The Emerging Property Tax Debate: Broad-based Vs Stamp Duty. Which is Better?

Property Tax Debate

The changing property market in Sydney is having more than just an influence on property prices which have seen a decline of over 5% in the year to June 2018. The NSW government is reportedly looking to change the way property tax is raised in a bid to stop the wild swings experienced in stamp duty revenue collections in the current market. A wide-ranging debate is asking, which is better? Stamp duty or a broad-based property tax system?

Although the market is still seeing property prices in Sydney trend down, experts are predicting this phase of the property cycle will be over by the middle of 2019. While prices may bounce back, and eventually exceed the peaks witnessed in 2017, broader changes impacting real estate could influence market behaviour in the longer term. Property tax is one area on the radar of government, and this could be a good outcome for real estate investors, depending on how any new system operated.

The NSW government’s budget is currently exposed to extreme revenue volatility due to property transactions fluctuating, resulting in an expected stamp duty revenue decline of $6 billion over the next 4 years. This contrasts sharply with recent years, which have seen surging stamp duty receipts turn the NSW government’s budget from deficit to surplus.

What Would a Broad-Based Property Tax System Look Like?

Some in the property sector have called for a broad-based property tax system that is less prone to volatility. Currently, stamp duty is paid when a property is sold. It is paid in a lump sum as part of the settlement process. The vision for a broad-based system, however, would see stamp duty abolished or markedly-reduced, replaced with an annual levy. Based on median house prices in Sydney, homeowners could pay around $1500 to $2000 annually, according to the Grattan Institute.

Those calling for change, such as Infrastructure Australia Chief Executive, Phillip Davis, say changes to the property tax system in favour of a broad-based tax could improve land use outcomes and help to deliver much-needed infrastructure faster.

Infrastructure Australia’s paper, Making Reform Happen, points out that property tax is one area holding Australia back as we try to cope with the “profound change” of population growth.[i]

Stabilising Revenue and Providing Certainty

The current system based on duties relies on the property market being stable. Yet, as we have seen in 2008 and 2009, as well as more recently, the property market is like any other; with rises and falls in the short and medium term and long-term steady growth. It plays havoc with the states’ budgets.

An annual levy could stop the uncertainty. State Governments would have a relatively predictable stream of land levies they could count on every year. As suggested by Infrastructure Australia in their Making Reform Happen report, better land use can lead to improved efficiency and productivity, distributing the benefits of the tax change throughout the wider economy.

Property Investors – Levies Could Work in Real Estate Investors’ Favour

One of the largest expenses facing real estate investors today is the cost of stamp duty. It is an up-front cost which takes several years of good rental returns to pay for. Investors may prefer to cash flow a levy expense than commit to the much larger lump sum stamp duty amount.

Property investors are already familiar with levies that are related to the property’s value. Many local governments, for instance, use land valuations in their calculations of rates. The whole dynamic around stamp duty reduction and land taxes taking their place could open further opportunities for property investors who won’t need to find the extra for stamp duty.

The ACT began phasing out transaction-based property taxes in 2012 and will have a levy-style tax in place collecting revenue by 2032. The ACT government moved to the new tax system for the same reasons as NSW – more stable revenue.

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[i] Razaghi, T. 2018, “Replacing stamp duty with broad-based land tax could increase revenue to $11.2 billion by 2047, new report shows”, Domain.com.au,  4 June 2018 https, <://www.domain.com.au/news/replacing-stamp-duty-with-broad-based-land-tax-could-increase-revenue-to-112-billion-by-2047-new-report-shows-20180604-h10xms/>