31 October 2022

Home Truths: Barr urged to get tax reform done to reap full rewards

| Ian Bushnell
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Home Truths

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.

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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.

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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.

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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.”

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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.

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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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HiddenDragon7:46 pm 31 Oct 22

“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.”

That might be one of the fairly obvious reasons why no other state or territory government has yet implemented such tax changes and why NSW Labor (currently odds on to form the next government of that state) has vowed to repeal Perrotet’s proposed changes if he manages to get them through the upper house before the election –

https://www.smh.com.au/national/nsw/minns-vows-to-scrap-perrottet-s-stamp-duty-reforms-if-elected-20221031-p5buh1.html

The reality is that the time has passed for this change to be made by individual states and territories acting alone (i.e. not as part of a major reform program involving the Commonwealth) because stamp duty revenues are now too large and important to their budgets and the trade-offs thus become increasingly painful as time rolls on – as we are seeing, even here, in the high average income, one party progressive policy laboratory which is the ACT.

If Commonwealth governments (of both persuasions) stopped bludging off state and territory governments by under-funding the costs arising from rapid population growth and the shared costs of new policy initiatives, there might be more scope to deal with property transaction taxes – but with a Commonwealth budget in substantial structural deficit, and a very large accumulated debt, there is very little chance of that happening.

Incidental Tourist7:33 pm 31 Oct 22

Higher Land Tax in ACT makes poor getting poorer and rich getting richer. When Land Tax is slammed to rental properties it becomes Rent Tax. It is incompetence to suggest that more tax ever made goods or services (including renting) more affordable. We all know too well that higher petrol excise makes petrol cost more, higher tobacco tax makes tobacco more expensive, higher GST shown on every tax invoice makes goods more expensive and higher land tax (rent tax) makes rents higher too. Highest rents in the country in ACT every day since last election is a daily proof that the Land Tax is impacting renters more than owner occupiers. QLD Labor government has just suspended their proposed Land tax reform admitting that it would cause higher rents. In fact Andrew Barr recently linked his emergency Land Tax suspension during COVID-19 to reduction of rent by 25% effectively admitting that ACT Land Tax causes higher market rents by some 25%. Denying obvious link between land tax and higher rents illustrates that some local academics live in imaginary world completely detached from reality. And what’s the “academic”advice? – Keep doing the same thing (of ramping up land tax) over and over again expecting the opposite result (of cheaper housing)? Does this “advice” fit the Einstein’s definition of insanity?

devils_advocate11:57 pm 31 Oct 22

@Incidental Tourist there are people that will tell you that increasing the rate of tax on landlords across the board will not result in increased rents (no matter what the market conditions). Rather, they will tell you, that increasing the tax liability on the asset will simply reduce the capital value (and therefore sale price) of the asset.

(Because as we all know, rents have stayed the same and asset prices for homes have fallen… lmao)

I’m not sure what we call these people… perhaps labor party hacks?

Incidental tourist,
There are some people who are so blinded by their own self interest that will tell you that landlords can just arbitrarily increase rents no matter the market conditions. Yet can’t explain why landlords don’t just do constantly so to increase their profit margins. Apparently they believe landlords are running some sort of benevolent charity, renting out their dwellings below market price.

Even when it’s explained to them that property prices and rents have exploded across areas of Australia that don’t have increased taxes, nor the rental control of the ACT, these people will claim that the ACT’s taxes and burdens on investors have caused all the problems.

I know exactly what we call these people: property investors.

With booming property prices, Mr Barr is making too much money from Stamp Duty to eliminate it.

devils_advocate5:04 pm 31 Oct 22

Although housing affordability for first home buyers is not raised in this article, as stamp duty imposts increase its also worth remembering: investors are able to claim back the full amount of stamp duty in the first year as a tax loss. Prospective owner-occupiers cannot claim the deduction, which further advantages the investor.

Mr Barr making too much money from stamp duty? Don’t you mean citizens of the ACT getting their fair share of revenues through tax changes and reforms that were well overdue? Tax changes that leaders in other states have been too weak to implement? Three cheers for Andrew Barr!!!

JackD,
The problem being that the reforms are taking too long and surely no one could argue that the increase in property prices has not delivered windfall revenue to the government that should not be counted on to be permanent?

They need to get cracking and finish the reform.

Yes, the reform is correct but they need to finish it far quicker, it should have been finished before the next election. But seeing as that’s out now, they should aim to get it done in the next 3-4 years.

devils_advocate12:44 pm 31 Oct 22

1) as many are fond of pointing out, stamp duty was meant to be abolished with the introduction of the GST
2) yes the government is addicted to the stamp duty revenue and no they won’t abolish it when the time comes
3) rates and land tax will continue to soar unabated. These taxes already constitute literally hundreds of dollars per week of the cost base of rental properties in the ACT.
4) the government will continue to express bewilderment as to why housing is so unaffordable

Agree 100% @devils_advocate. The only other thing I would add is that it is more beneficial for the average Australian citizen to pay stamp duty upfront in one go when they buy a property. The idea of continually paying the government ongoing fees and duties (like stamp duty) every year is wrong. And even if house prices do ever drop, the socialist ACT government will ensure other ongoing fees like land rates and land taxes will only ever increase (so overall, people are paying more for less). The ACT government takes so much from people, but gives very little back to people (e.g. health, roads, and education are woeful)

devils_advocate3:17 pm 31 Oct 22

@jorie1 I actually wouldn’t mind some genuine socialism, in the sense of redistribution of wealth towards the homeless, incentivising new supply of affordable housing (or, at least, removing the worst of the deadweight disincentives) or literally anything else that would help people who are not the “two EL2 incomes no kids” demographic living in the inner suburbs of Canberra.

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