Stamp duty change could be dead in the water

Stamp duty Australia property economic reform COVID-19 tax

It is hard not to escape the conclusion that the biggest proposed economic reform arising from the COVID-19 pandemic is already dead in the water.

With the call that no government should “waste a crisis”, there has been a chorus of people claiming that reforming stamp duty should now happen.

Stamp duty has risen to the top of the list of “inefficient taxes’’ that should be replaced for a good reason.

With not enough indexing of the scales and many suburban homes in Sydney and Melbourne easily breaching the $1 million mark, the amount of stamp duty being paid for everyday transactions has ballooned ever higher.

It is a very concentrated tax, falling on a small sector of the population and it has become a significant blockage to households to change to more appropriate housing at various life stages.

Also, despite some first home owner exemptions, it has also become a significant barrier to home ownership.

For example, retirees who live in a large house in a suburban setting might be more willing to move to a smaller property with less maintenance if they did not face a massive cost for stamp duty in making the change.

Similarly, a young family might be able to buy that elderly couple’s house with good access to schools and shops if they did not face a similar massive up-front bill that can now quickly run towards $100,000 given high property prices.

Victoria and NSW both looking to replace stamp duty

Both the Victorian and NSW Governments are looking to reform stamp duty in the wake of the pandemic with the mooted change being to impose an annual land tax bill on everybody who owns a house.

That echoes a recommendation found in Ken Henry’s 2010 tax inquiry.

The reform would also help state governments by replacing volatile stamp duty with a much more reliable and steady amount of land tax, which for the first time would be levied on owner occupied houses.

Reform will not be easy

The problems with that idea are now coming into stark relief with Victorian Treasurer Tim Pallas already calling on the Federal Government to temporarily underwrite the state’s budget if it decides to proceed with the reform measure – a call which was quickly rejected by the Feds.

The raw numbers show why that may be fatal for the chances of getting through any changes to stamp duty.

To replace the anticipated revenue of $6 billion a year from Victorian stamp duty, the state government would need to impose an average annual land tax on every single house owner of $4000.

For some, that amount would be far larger and for others much lower but it would remain a significant and recurring financial impost that promises to be hugely unpopular with voters.

A hefty new tax would be electoral suicide

How do you tell millions of people who currently pay no land tax on the home they live in that they will now face bills equal or even much greater than council rates in perpetuity?

All to replace a stamp duty tax that they have already paid when they purchased the home?

That looks and feels like electoral suicide which is why the ACT remains the only jurisdiction in Australia that is in the process of replacing stamp duty with land tax using a lengthy reform process.

Such a change could also be incredibly unfair on some house owners who may simply be unable to afford the land tax on their property and will need to sell up or take out a reverse mortgage.

Such asset rich and income poor home owners are becoming more common as the Australian population ages so it will be a significant impost if the State Government suddenly replaces stamp duty with a new tax on family homes.

The ACT also has the advantage of being both the “state government” and the council so it has incorporated the changes into council rates and is less than half-way into a 20-year gradual reform path which will wean the territory off stamp duty revenue until it is abolished entirely by 2032.

Already ACT households and particularly those in units are facing rate increases far above inflation have been complaining loudly about the result – which has also reduced or eradicated some payroll and insurance taxes.

Some phase-in options

One of the obvious ways to phase in such a change would be to “grandfather’’ those who already own a house and leave them under the old rules until they next bought a house.

The big disadvantage of this very gradual approach is that the stamp duty revenue will just evaporate in a big way and will take many years to be replaced by increased land tax – which is probably why Treasurer Pallas asked the Federal Government for a helping hand.

Another approach is to have people opt in or opt out of the land tax system at the point of purchase – so you can either choose to pay a large stamp duty bill or effectively pay off that bill over time, just as many council rates have been broken down into instalments as the overall number grew.

Gradually, that could morph into a system in which increasing numbers of home buyers decide to effectively pay their stamp duty in instalments over many years instead of up front, which effectively often adds stamp duty to the mortgage.

Again, that would be a very slow boat to reform and it is unlikely that any other nasty state taxes – with payroll tax and stamp duty on insurance two good examples – could be removed by such a process.

In the end it is a political rather than an economic decision and a task that no state premier would relish – no matter how popular.

There is a very big “too hard’’ basket at every level of government and it would not be a surprise to see this proposal end up there.

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