Tax reform has helped those at the lower end of the market buy townhouses and apartments. Photo: Michelle Kroll.
Tax reform in the ACT is halfway through a marathon 20-year process, but there are fears the Barr Government is running out of puff.
A model program praised by economists and admired by state governments such as NSW, its goal is to provide a fairer and more reliable revenue source for the government other than duties, particularly stamp duty on property purchases.
At the same time, the switch from stamp duty to broad-based land tax and higher residential rates would have positive effects on the housing market, such as making it easier for first-home buyers and increasing mobility, particularly so older properties can be turned over more quickly in the market to regenerate suburbs.
The government even suggests that rents may have decreased and the supply of rental properties increased, even though the past couple of years may have put paid to that.
In fact, the COVID-era property boom has prompted criticism of the program for stamp duty cuts failing to keep pace with dwelling prices, with purchasers of the more expensive standalone houses hardly benefiting, or not at all, when the median price is about $1 million.
Some question whether the government will ever get rid of stamp duty, saying it is addicted to the revenue, and questioning its revenue-neutral claims.
Writing in the Australian Financial Review, John Kehoe says it’s unlikely stamp duty in the ACT will ever be abolished.
“The problem is that stamp duty’ bracket creep’ has gone through the roof,” he says.
“The modest reductions in stamp duty rates and adjustment in thresholds have failed to keep pace with house prices. Stamp duty payable on the Canberra median house price has increased by almost $16,000 in a decade when stamp duty was meant to be phased down.”
Others are concerned that the reform timetable is too slow and that the government is losing the appetite for having to fight for tax reform at every election as rates and land tax rise and stamp duty revenue continue to be considerable.
The last ACT Budget estimated stamp duty revenue for 2021-22 to be $314 million, and forecast the take to be $267 million next financial year as the housing market cools. It will continue to decline, but in 2025-26 the net is still expected to be $222 million.
But Chief Minister Andrew Barr says the only threat to the tax reform program and more stamp duty cuts is the election of a Liberal government.
Mr Barr says the government will stay on course to reduce stamp duty every year, targeted at owner-occupiers at the lowest property price thresholds, which still reduces stamp duty for all purchases.
The ACT Budget has also increased the eligibility thresholds for the Home Buyer Concession and Deferred Duty and Disability Duty Concession Schemes.
Mr Barr says that halfway through the program, about 50 per cent of insurance and conveyance duty revenue that would have been collected has been replaced by general rates.
That revenue was estimated to account for about 26 per cent of the total own-source taxation revenue at the start of the reform program in 2012-13, but by the end of the forward estimates period in 2025-26, it is expected to fall to 10 per cent.
Mr Barr says a pre-COVID analysis in 2019 found residential property turnover had increased, rental prices decreased and rental supply increased – “noting that the lower rental quintiles were likely to have experienced the larger percentage decreases in rents”.
“Tax reform has increased economic efficiency and resulted in economic growth,” he says.
“Real GSP, household consumption and investment have increased every year, with the increases growing over time.”
Director of the Tax and Transfer Policy Institute at the ANU’s Crawford School of Public Policy Dr Robert Breunig says the premise of the reform program is correct and the result will mean a more reliable and fairer system.
But he believes the 20-year timetable is too long and the government should be further along the reform path than it is, and he wonders whether the government has the stomach to keep going.
“By not going all the way, we fail to capture the benefits from this switch: easier mobility, more predictable revenue and lower house prices,” Dr Breunig says.
He reckons that with such a strong majority in the Assembly and a low risk of losing power, the government should push the accelerator and get the job done sooner rather than later so all the benefits start flowing.
Dr Breunig says it is difficult to say whether the first half of the reform program has positively affected the housing market and increased the number of first-home buyers.
It has made it easier at the lower end of the market, but the removal of stamp duty there has also allowed first-home buyers to increase their loan capacities and bid up prices.
“This effect was made worse by the fact that the stamp duty reductions were on less expensive houses, but the land tax increases were mostly on more expensive houses,” Dr Breunig says.
“So there was little downward pressure on prices coming from the land tax on these less expensive houses. This is why the simulations done by the University of Canberra showed that housing actually became less affordable at the bottom.”
The system has also become much more progressive than originally intended, and whether that is good or bad depends on your perspective.
“While the switch was revenue neutral, it wasn’t distributionally neutral,” Dr Breunig says.
“Stamp duty reductions went to the bottom, but land tax increases went to the top. Expensive houses in inner-Canberra suburbs continue to have high stamp duty but also attract high land tax.”
This distortion mutes the benefits of the switch.
“If you want older couples in these expensive suburbs to downsize out of big houses, this is an impediment,” Dr Breunig says.
But the ACT remains in a better position than other jurisdictions, and the switch to land tax is something Australia needs.
Dr Breunig says government-built infrastructure, such as schools and roads, increases the value of property, so it is only fair that it be taxed.
“It is true that without a land tax, and any real tax on unoccupied housing, that asset price inflation has really contributed to inequality,” he says.
The twin goals of a fairer housing market and more efficient tax system can be achieved. The government just needs to get on with it.
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