Tax reform might be a bridge too far for Victorian election

Everybody hates paying tax, but we all hate some taxes more than others.

The ones we don’t mind so much tend to be those that apply to others rather than ourselves – which is why the looming state election will be an interesting test case.

Business, from their perspective, have called for a radical overhaul of Victoria’s housing and payroll tax regimes as part of a push for far-reaching tax reform to reinvigorate the state’s economy.

The Victorian Chamber of Commerce and Industry (VECCI) wants payroll tax abolished entirely for businesses operating in regional Victoria so that companies are encouraged to invest outside of Melbourne.

VECCI wants to replace stamp duty, reform payroll tax

They didn’t stop there, asking for a complete review of the way taxes are levied and collected in Victoria – starting with replacing stamp duty charged on housing with an ongoing annual land tax, similar to council rates.

That has little chance of being considered by either side for the Victorian election, even though stamp duty has long been criticised as an inefficient single hit tax on property transaction that makes housing less affordable and discourages people from downsizing or moving.

The reasons this won’t be considered is that stamp duty brought in around a third of Victoria’s tax revenue in the last financial year.

States have narrow tax bases

While that percentage swings wildly according to the volume and value of property transactions, it will not be easy to replace.

State governments have a very narrow band of taxes at their disposal and they will be very careful about replacing one with an annual payment that would take a long time to build up, leaving them with a big revenue hole.

That is the reason the New South Wales Government has chosen an optional scheme, with first homebuyers able to choose between paying normal stamp duty or annual payments.

Even that pared back plan, however, is running out of time to be passed before there is an election in NSW, with the Labor opposition keen to instead force the tax changes to be taken to the election.

Queensland ramping up land tax

In Queensland, there is a different debate altogether with its radical plan to force property investors to tally their interstate property and then pay a higher Queensland land tax being followed by a massive increase in the number of land tax bills being sent out.

Thousands of homeowners across Brisbane will soon be getting their first land tax bills after Queensland Treasury confirmed it planned to double the number mailed out across the state last financial year.

While the new tax changes are expected to raise the number of land taxpayers again next year, this year the increased number of bills follows a rapid rise in property prices, which has seen median residential land values in the Brisbane council region rise by 25% to $580,000 since they were last issued in 2020.

People with total Queensland landholdings worth more than $600,000 are liable for land tax, with exemptions for the principal place of residence, although landholders need to claim that exemption after getting a bill.

About 23,000 letters are expected to be sent to potential Queensland land tax payers – up from just 10,291 last year.

The sting in the tail this time around is that many of those property values may have fallen since the latest valuation was arrived at, so you can end up paying taxes on a valuation that is no longer accurate.

Around 60% of those sent letters normally claim the principal place of residence exemption.

Victoria is understood to have privately examined a similar proposal to Queensland but it is considered unlikely for any changes to be mooted before the Victorian election.

Separately to the Victorian Chamber of Commerce and Industry request to revamp stamp duty, research by the Grattan Institute has found that abolishing stamp duty would lead to better use of the existing housing stock, leading to lower house prices and rents in the longer term.