Property Australia

Why swapping stamp duty for a new land tax isn’t so simple and isn’t working in the ACT


If the abolition of stamp duty was a football club, the Property Council would be the number one ticket holder.

It’s Australia’s least efficient and most unpopular tax. There is widespread agreement it does more harm than good.

It is fifty per cent worse for the economy than company tax (measured in terms of marginal excess burden). It discourages people from buying or selling housing, lowers labour mobility, restricts housing supply and is a highly volatile revenue source for state and territory governments. It does virtually everything an efficient tax shouldn’t do.

The NSW Treasurer Dominic Perrottet has put the abolition of stamp duty back on the agenda. It’s an important discussion, but one which needs to be tempered by a few hard truths.

The big problem with stamp duty is a $21 billion one. That’s the revenue mountain to climb if it were to be abolished. State governments have allowed themselves to become increasingly dependent on stamp duty and by failing to adjust stamp duty tax-rate thresholds, governments have let higher house prices sweep properties into ever higher stamp duty brackets. Stamp duty paid on the median house price in Sydney in 1995 was $4,685. Now, it’s over $36,000.

This rocket-fuelled bracket creep has been a deliberate policy of wilful negligence on all governments. But it also clearly isn’t feasible for them to go without this revenue.

The current proposal is to create a new land tax on owner occupied housing (and perhaps agricultural land and religious properties). Currently only business properties, investment housing and holiday homes pay land tax.

While swapping stamp duty for land tax seems like a good idea, it turns out that it isn’t so simple. And it certainly isn’t working at all in the ACT which is sometimes held up as the model for reform.

So, what are the difficulties with this approach? Mostly, it’s the size that a new land tax on the family home would need to be to pay for the full abolition of stamp duty.

In modelling for the Property Council, Deloitte Access Economics estimated that the average ‘land value property’ would need to pay $2400 a year. However this is an Australian average. Different underlying land values would produce very different tax outcomes.

For Parramatta in Sydney’s middle ring, the new land tax would be closer to $5000 a year and for inner ring suburbs such as North Sydney this would climb to over $10,000 a year.

No one should underestimate the political difficulty of selling this type of new tax for every household in Australia.

This challenge is borne out by the experience in the ACT. In 2012 it began what was billed as a 20 year program to abolish stamp duty and replace it with single land tax-style property rate.

Eight years in, we’ve learnt a few things. Firstly, stamp duty isn’t on the way to being abolished by any measure. Total stamp duty revenue has only fallen by one per cent from $268 million in 2011/12 to a budgeted $265 million in 2019/20.

While some stamp duty rates have been lowered, others haven’t. Canberra residents still pay fairly sizeable stamp duty bills for property: $17,880 on a $650,000 house, compared to $15,100 in Queensland or $24,682 in NSW.

Secondly, the change hasn’t been revenue neutral as promised. The combined revenues of stamp duty, land tax and general rates have ballooned over this so-called reform period.

Third, businesses are being double taxed. More of the rate burden has been pushed onto business properties. Reasonably sized business properties are now subject to general rates of up to 5.3 per cent. This is effectively a stamp duty sized tax - payable every year. And they still pay stamp duty when the properties are sold.

Finally, there is still 12 years to run on the ACT reform program. , The government can’t say how high these property taxes will be at the end of this process or when stamp duty would actually be abolished.

There’s no simple solution to Australia’s stamp duty dilemma. There is no doubt that abolishing this tax should be a top reform priority. However, a simple swap into a new land tax isn’t so simple and isn’t working in the ACT.