NSW & VIC Shift from Stamp Duty to Land Tax

I know this thread *technically* should go into the 'Tax' section on Property Chat; but actually it firmly belongs in Economics and perhaps even Property Strategy.

Both NSW and VIC Gov's have made mention of an intention ahead to shift from a 'one time, lump sum' Stamp Duty on property purchases, to an annualised 'Land Tax' model instead.

This thread is specific to requesting (and respondents to share!) any official State-Gov announcements that aren't just generalised; but go into specifics on the policy, the rollout, and the consequence or changes for existing Residential property owners in these states (be it PPOR owners or Investment owners alike) who'd already paid any stamp duty on their currently held properties already.

This is a big issue for prospective PPOR and/or Investment would-be buyers in the 12 months or so ahead. People will naturally want to know what the precise policy would be, to calculate whether they are better off buying before land tax and paying stamp duty (which may come with some exemption on land tax altogether, or much lower permanent land-tax payment scale for them specifically); or whether they are better off to wait, avoid SD altogether and cop Land tax every year at the full land tax rates (whatever those are to be... hence my point of this whole post in requesting specifics!).

Would-be buyers cannot possibly make an informed purchase-timing decision without these essential facts. Especially those who know that their holding period for said purchase will be a specific number of years (Either short, medium, or long i.e. 30 years); because for these buyers who have an idea of their intended hold-years-duration; they'll be able to do the math once armed with all the land tax costs, thresholds, etc.; for their intended holding-period, to see if they'd be better off just paying an upfront stamp duty (if they do get entitled to an exemption etc., that is!)

So... All I've seen are a lot of fluffy/generalist articles on mainstream news sites - it seems that State treasurers are loosely talking about it as are economists. None of them go into any numbers or specifics; i.e. none of them answer the specific burning questions such as:

• What are the annual Land Tax % rates to be, once it commences? Will it be incremental in rate-volume based on different "unimproved land value" ranges?
• What will the land tax "land value threshold" (if any??) be, in either of these states? E.g. Will it reduce to $0 land value is exempt, or will it reduce from the (roughly - don't quote me) current ~$600K - ~$700K of unimproved land value to a modest land value of say $25K or $50K+?
• If a modest base and not a 0-base was to be announced, for instance, you'd imagine the implication for some property-types could be - wait until post-SD date to purchase and *possibly* avoid BOTH Stamp Duty and Land Tax Altogether! What do I mean? For instance; imagine a highrise apartment buyer in the outer suburbs of say Sydney (think: those towers going up in the Hills District of Sydney or Penrith or some other far-out region on a smallish land lot but with hundreds of units in a tower on it). If say a modest $25K or $50K land tax threshold was included in the Land Tax reform; these buyers, if purchasing said apartment after the Stamp Duty abolition; may well be exempt each year from paying Land Tax too; because if there's say 200 in the complex, then 1/200th of 'land value' of far-flung/lower value areas would likely be under the $25K-$50K land value threshold. If so, for folks like that, they'd be foolish to buy pre-changeover right? Because if they waited they could avoid paying any tax at all? This outcome of course seems unlikely as I'm sure clever NSW and VIC will dot every i and cross every t in their plan formation (in fact... I'd wager that state rev/tax teams building such policies trawl sites like this on the regular because they know the investors congregate here and that we'd be smart to plan out any loophole or low-tax scenarios to 'carpe diem' on them!). So... This outcome seems highly unlikely and I'm guessing Land Tax would apply from $0 or $1 land value or higher, every damned year, for every damned residential property transacted after the Land Tax reform commencement date
• Which leads into... if it'd be a $0 land-value base as the likely outcome (so, no threshold); has there been any policy wording created/released in them making it a marginal tax table/base (I.e. the 'wealthier' you are in terms of the more 'unimproved land value' you own; the EXPONENTIALLY higher tax you get slapped with? I.e. a 'tax the richer, more' scale?). E.g.... "Land value $0 - $50,000 = land tax of 0.5% per year", then "Land value of $50,001 - $200,000 = land tax of 0.75% per year", then "Land value of $200,001 - $500,000 = land tax of 1.25% per year" and so on?
• For any existing ACT investors (I don't invest there so I'm not in the know...); will/is the recurring annual land tax payable in places such as ACT already allowed as a tax deductible running expense for investment properties in ACT (e.g. such as Council Rates, Water, and Strata rates and maintenance all currently are)? If so, I'm assuming this would apply for investors in NSW/VIC once the change-over to Land Tax commences; given deductibles are a federal income tax calculation? Anyone read any specific info on that?
• Have either NSW or VIC Treasurer's mentioned a solution for the 'double tax' problem of those who've already paid stamp duty being double taxed? Has a specific solution been announced for these folks? E.g. Be it a "No land tax payable ever" for previous Stamp-Duty payers (which seems HIGHLY unlikely given the whole point of this is for NSW and VIC to find a way to earn MORE tax revenue...). Or, will this be a "People who paid stamp duty 0-10 years ago (but 11 or more years ago, you get no benefit) get entitled to a sliding scale of exemption or reduction over the next 10 years post Land-tax kicking in" solution? As in; if you just freshly paid a wallop of SD on a purchase just 6 months ago; you'll get say 90%+ off your annual land tax bill in year #1 ahead; then every year your discount gets reduced until say year #10 where you just forever-more get slapped with 100% land-tax rate each year? (this seems more likely); or will it be a "Nope NSW/VIC; you can all suck it up; you'll ALL get slapped with full annualised Land Tax every damned year at full rate, no matter if you bought and paid stamp duty on a property 0 years ago, 5 years ago, or 50 years ago!!" (this seems cruelly unfair and unlikely - I'd imagine State Pollies would get death threats or at least some eggs tossed at them in a crowd, if they took this stance!)

Its this last one to me that is the most pertinent. I believe state govs will hold out on disclosing this final part of their policy until, well, right before the moment the policy takes effect (so as to reduce their revenue-raising 'fallout' from the smart buyers who'll wait for the detailed rules; then run the maths and then strategically choose when to time their upcoming purchases thereafter)

State Govs can do a great job but they can also be intentionally vague. I imagine it'll be a "here's the date when we abolish stamp duty; here's the new annualised land tax rates" statement, but they will not address what the rules will be for those who purchased pre-change-over; until AFTER their tax law has been implemented.

Can ANYONE who is interested in this topic and finds any news or State Gov releases that DO go into the specifics, please share or link such articles into this thread?

I'll do the same should I come across anything (for my particular state of interest, I've setup Google alerts on 'NSW Stamp Duty' and 'NSW Land Tax' keywords).

Again, looking for specific policy/% numbers, conditions and concession-scales ideally!

 

All talk - won’t happen

 

Ok. Are you able to elaborate?

There seems to be a lot of momentum behind this at present. More than I've observed in these states in at least a decade. States getting desperate for the revenue whilst facing higher running costs due to Fires Recovery / COVID-19. Shifting to Land Tax would be more lucrative for them.

Interested to hear you back up your view that it won't happen.

 

This is in the process of happening in the ACT, started in 2012. If the states follow the ACT method then over a long period, perhaps 20 years, the rate of stamp duty will be wound down to zero while land tax will slowly increase. We have already had stamp duty on insurance removed.

 

Politics and logic don’t go together

The removal of stamp duty will need to be replaced by a broader land tax - good luck introducing a broader land tax which will be a new cost for many. A broader land tax will include PPOR and that would be political suicide

 

Yes, land tax is increasing but there will be no land tax on ppor. Rates are increasing by large amounts on both ppor and ips as a result of this (they can do this in the ACT because there are no councils so the ACT government controls rates). Also, in the ACT all investors paid land tax anyway because there was never a threshold. So it is very different politcally because they are not introducing a new tax that people never paid before... but just increasing an existing one. It may be the same $ in the end but I think they can get away with it more easily. Though, in the ACT the land tax was already massive so it is hard to imagine how investing will be worthwhile in the ACT if land tax doubles or triples along with increased rates.

The other thing in the ACT is that stamp duty is actually tax deductible for investors because it is leasehold so investors gain no tax advantage via being able to claim land tax over a number of years vs capital cost of stamp duty, in fact better to claim the stamp duty on purchase whilst you are working and not have extra land tax to claim later when retired. So it is going to make the ACT a lot less attractive place to invest. I would think more ACT investors have been buying just across the border where they want to purchase something close to home.

 

'Our worst tax': opt-in stamp duty in tax overhaul
'Our worst tax': opt-in stamp duty in tax overhaul

Relevant bits copied below from today’s AFR. These economists pushing for a land tax thinking SD is an impediment to first homebuyers ...don’t they know FHB get SD exemptions already? Such a convenient argument. If this gets through esp if it covers PPOR, holding property long term just got more expensive. And how is that fair to retirees? And this John Fairbairn guy who thinks someone who sits in the same house contributes nothing compared to those who move for job opportunities every 5 years...WTF??


“Former Telstra boss David Thodey is due to deliver his Federal Financial Relations report to NSW Treasurer Dominic Perrottet this week. The need for tax reform and abolishing stamp duty, which discourages people from moving closer to jobs and is a barrier to home ownership, will be a key theme in the recommendations.

John Freebairn, an economist and member of the Thodey review for NSW, said stamp duty was "very unfair" and a switch was needed to a property tax based on the value of unimproved land.

"With stamp duty, someone who moves every five years because of changing jobs contributes a hell of a lot to health and education," he said. "Someone who sits in the same house forever contributes nothing.”

Mr Perrottet and Victorian counterpart Tim Pallas are discussing leading the federation away from dependence on stamp duty on residential property purchases, which raises about $20 billion a year for the eight states and territories.

The role of federal and state treasurers in pursuing economic reforms was elevated on Friday when Prime Minister Scott Morrison announced the abolition of the Council of Australian Governments.

Taking charge
Spending ministers will be largely sidelined as federal, state and territory leaders, through the national cabinet, and treasurers, via the Council on Federal Financial Relations, take charge in driving reforms to tax, deregulation, health, skills, education, energy, housing, infrastructure, population, migration and transportation.

Businessman Tony Shepherd, whose audit commission for the Abbott government recommended scrapping COAG, hailed its abolition.

"COAG was not fixing the overlap between federal and state governments, which was expensive and inefficient ... so it's an outstanding decision by the Prime Minister and states," he said on Sunday.

On stamp duty reform, one proposal is to give future property purchasers, including first time buyers, the right to choose between the huge one-off upfront cost of stamp duty or to "opt in" to pay an annual land tax of a few thousand dollars each year.

Past home owners who paid stamp duty could be grandfathered under the opt-in land tax system, which would avoid double taxation and not upset too many voters.

However, this would be a long-term reform, with the transition taking many years.

A new tax reform report by PwC finds state governments have a "lack of fiscal discipline" and "rely on distortionary and inefficient" taxes.

PwC tax partner Paul Abbey said stamp duty was "easily our worst tax" nationally and should be phased out for future home buyers.

"The only way we're going to get the public across the line is to give them choice [between land tax and stamp duty]," he said.

"You need to marry 'opt in' with allowing the states to convert the future land tax streams into revenue – to borrow through securitisation to smooth their budget revenue out of the stamp duty.

"This would ameliorate the political impact, and ameliorate the cash flow impact on the states."

Alternatively, to fill a revenue hole as states gradually make the transition from stamp duty to land tax, they could borrow cheaply in the credit markets for 10 years at less than 2 per cent.

To avoid hitting the budget bottom line, states might use off-balance-sheet entities, such as the federal government does with NBN Co.

Another option being pushed by economists consulted by the Thodey review is to move faster to an annual land tax system for everyone. To soften the impact, the government could pay a credit for stamp duty to anyone who bought a home in the last five years.

Efficiency gains
“A sudden switch that is revenue-neutral – you get all the efficiency gains," Professor Freebairn said. “But someone who has just recently paid stamp duty is badly done by.”

The sliding credit scale could be 50 per cent of stamp duty for a home bought in the previous year, a 40 per cent credit for homebuyers two years ago, 30 per cent for three years back, 20 per cent four years ago and a 10 per cent credit for a person who acquired a property up to five years ago.

A drawback of immediately applying a land tax to everyone and giving only recent buyers a credit is that it could be unpopular with many homeowners and politically risky for a state government.

The PwC report says stamp duties and insurance levies are "inefficient and can deter otherwise beneficial transactions from occurring".

The existing federal and state tax system is ill-equipped to support a growing economy, the report says.

"A challenge facing Australian state and territory governments is that they have become increasingly reliant on a narrow range of taxes that have certain undesirable characteristics.

Economic costs
"Due to limited revenue-raising options, Australia’s states and territories continue to levy a number of highly inefficient transaction taxes, such as stamp duties and insurance levies."

Switching from volatile stamp duty to a steadier broad-based land tax could make NSW residents $4 billion to $5 billion better off a year, according to a report by the Grattan Institute.

About 60¢ in every dollar raised from residential stamp duty is lost because of the economic costs it imposes, it estimates.

PwC's Mr Abbey said long-term tax reform was the economic "reset" the country ultimately needed.

But first, he said, governments must focus on supporting the economy through the crisis such as through investment allowances to boost demand, before pursuing more major tax changes when people are feeling more confident about the economic recovery.

"We need confidence to return before tax reform," he said.