"As options to replace stamp duty are concerned, this really only leaves the one that was ignored: GST."
Increased GST is the only real alternative to stamp duty: Enzo Raimondo
Residential transactions in Australia generate a very high level of economic activity and create demand for a range of products and services directly related to housing transactions. In 2010 there were approximately 544,000 transactions of established housing and an additional 103,000 purchases of new dwellings. In Victoria in 2010 there were 133,000 established residential transactions with a value of $64 billion, and this represented 24.4% of the total established residential transactions.
Stamp duty on these transactions is one of the few state government taxes, and it provides approximately $27 billion or between 19 and 26% of their total revenue. Victoria has the highest at just over 26%.
Thankfully after debate lasting over a decade there is a level of consensus that stamp duties should be replaced. In 2000 the REIV commissioned a report from Access Economics titled The Economic Impact of Reducing State Taxes on Property, and in this report it was stated that reducing any of the state taxes on property would provide economic benefits greater than would be attained if payroll taxes were reduced by the same amount.
REIV members regularly report that stamp duty is a significant barrier for purchasers but unfortunately, there is a lack of consensus on how stamp duty should be replaced.
When the Henry Tax Review released its report on Australia’s future tax system it was done so with explicit instructions to not consider changes to the rate of GST.
This constrained the options that faced the panel of Ken Henry, Jeff Harmer, John Piggott, Heather Ridout and Greg Smith. As a result, they decided the best option to replace stamp duty would be to introduce a new tax similar to municipal rates or a broad-based annual land tax.
This would be a tax levied by state governments.
There are considerable flaws with this idea; it would be so complicated and take so long to equitably transition from stamp duty to land tax as to be unfeasible. This is especially the case when the politics are taken into account, as very few political leaders would be prepared to effectively double home owners’ annual municipal rates, even if it were in place of stamp duty.
There is, of course, inter-governmental politics at play here. The federal government, which sets the GST, does not want to suffer voter backlash, which is why it says the states are free to remove stamp duty. That is code for telling them to replace stamp duty with another state tax.
Income taxes are similarly politically charged and unlikely to be increased. The decision of the ACT government to do this, particularly to levy land tax those who have paid stamp duty, will therefore be keenly watched by other governments and the property industry.
As options to replace stamp duty are concerned, this really only leaves the one that was ignored: GST.
When the GST was introduced it was done so to remove inefficient state taxes; indeed, it was sold as a state tax. The state government already taxes commercial gain from property through land tax, and the personal tax structure is designed to tax wealth for redistributive purposes. There has never been a rational argument for taxing property ownership – except, of course, it is easy to collect because land is fixed and immobile.
In light of that, it does not seem sensible to ignore the efficient and effective broad-based tax that is already in place: GST.
This was the initial promise of the GST, and it’s time that I was fulfilled.
Using some back-of-the-envelope calculations it’s clear to see that increasing GST from 10% to 12.5% would raise the amount required to eradicate stamp duty. Unlike bringing in a new land tax, the collection cost would be almost zero and it would be substantially cheaper than creating a new taxation system. It would also avoid the need to transition from one property tax to another.
While GST was ignored as an option in the Henry Tax Review there is little chance that stamp duty will be eradicated.Enzo Raimondo is CEO of the Real Estate Institute of Victoria.