Article by Rachel Epstein
The idea of abolishing stamp duty has been discussed for decades and is one many economists have shown support for — especially in recent years as the property market has boomed and house prices have increased significantly.
Whilst the concept of getting rid of Stamp Duty and creating a more efficient tax system seemed to be just talk for many years, it seems this idea may just come to fruition, starting in NSW.
Following the devastating effects of COVID-19 on the Australian economy, NSW Treasurer Dominic Perrottet is planning to take action and work towards recovering NSW’s economy through debt-funded spending and sweeping tax reform, with a specific focus on eliminating Stamp Duty.
The NSW treasurer is proposing to gradually replace stamp duty with a land tax. Instead of paying a one-off upfront payment on the purchase of a property, buyers instead would pay an annual tax based on the value of their land.
Under the new proposal, certain first home buyers may also become eligible to receive a $25,000 grant in place of the stamp duty concessions, giving them the opportunity to get their foot on the property ladder as well.
This year has been a huge economic challenge for the Treasurer, as the large decrease in property market activity has reduced the amount of stamp duty flowing into the state’s resources. The proposed changes aim to create a more stable and long-term revenue stream.
The NSW Treasurer has proposed the changes in a way that will inject a significantly larger amount of money back into the economy. Whilst the initial upfront budgetary cost will be circa $2.1 billion, projections show that replacing stamp duty with an annual land tax would bring in as much as $11 billion into the economy over four years due to increased transaction activity (consider all the flow on spend associated with property buying), a $3 billion increase from the circa $9 billion that usually comes in [1].
Federal Treasurer Josh Frydenberg seems to be in favour of the proposed changes, noting “I commend the NSW Treasurer for seeking to lift productivity in his state while encouraging investment and supporting the recovery”. [2]
There are, however, some doubts and speculations that come with this change.
As the NSW government is making this change optional for now, there becomes room for buyers only planning to keep a property short term to opt out of paying as much tax, putting into question the overall equality and effectiveness of the changes.
Similarly, some believe the “opt-in” transition to the land tax may paradoxically worsen the very “lock-in” effect of stamp duty it is intended to undermine. For example a landowner not paying any tax at their current home has the same incentive (as under the current Stamp Duty regime) to stay where they are, not move, and therefore avoid paying more tax. [3]
Whilst NSW works towards potentially implementing this reform, the pressure is now on for the other states to decide if this would also be the right move for their economy, with Victorian Treasurer Tim Pallas handing down his budget tomorrow (24 Nov).
References:
[1] ABC, NSW Budget proposed property tax overhaul is huge challenge for Perrottet – https://www.abc.net.au/news/2020-11-17/nsw-budget-perrottet-property-tax-could-help-end-recession/12890656
[2] AFR, Frydenberg commends NSW on pursuing tax reform – https://www.afr.com/politics/frydenberg-commends-nsw-on-pursuing-tax-reform-20201119-p56g4f
[3] AFR, NSW’s brave stamp duty switch should be even bolder – https://www.afr.com/policy/tax-and-super/nsw-s-brave-stamp-duty-switch-should-be-even-bolder-20201118-p56fkh
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