A colleague of mine recently attended a roundtable meeting with the NSW Treasurer Dominic Perrottet for an open discussion regarding the proposed changes to property stamp duty in NSW. While many of the points raised are familiar, I was interested to hear from my colleague about some of the areas the Treasurer canvased and responded to.
One of the most interesting comments was if in fact the proposed reforms were even possible, which is a reasonable starting point given the long history around one of our most unpopular taxes. A point where I’m totally on-side with the long overdue need to change the existing stamp duty and possibly with bold policy.
The Treasurer’s opening comments made the point that tax reform is never easy, but even so he suggested that there must be a better way to raise the necessary state revenue as stamp duty in its current form is a poor tax. However, the Treasurer noted in NSW stamp duty is the second highest source of revenue to pay for state Government services, implying I assume, a cautious approach.
It was also acknowledged that there have been many reviews in the past and the need for change is obvious.
One idea suggested, and I think an interesting approach, was to think of the reverse position that is, if it (stamp duty) was being considered as a new tax would stamp duty ever be adopted and in what format?
According to other comments at the meeting, the review would help create wider property ownership, which has been in decline. One reason for this is the current stamp duty acts to constrain the market and this then directly impacts housing supply and market mobility.
Other areas of discussion centered around affordability, first time buyers, existing owners, retirees and how land tax might be managed if people fell into debt. There were also aberrations as diverged as an estate/death duty, an extension of the GST or that buyers shouldn’t pay any duty or tax!
One example imagined by the Treasurer is interesting to consider. Young people often wish to enter the property market and they expect they may have to move many times as their personal circumstances change.
Often, they start living independently in a rented apartment (often as a stop-gap measure) but the reality of having to pay stamp duty each time they move, means that currently they delay moving and end up staying in the rental market, as it’s seen as more flexible.
Then of note, is the position of older homeowners at the opposite end of the market. Retirees and older homeowners delay moving to what might be more suitable accommodation because of the burden to pay stamp duty. The upshot is they ‘stay put’ and this can further restrict market mobility and adversely reduce future supply.
As a result, and partly demonstrated by just these two examples, the Treasurer suggestedthat it is time for an open-minded approach to take on the task of reforming stamp duty.
Among several topics that generated a lot of comment was the impact of stamp duty on first-time buyers, both the current rules and the proposed new choice of paying either stamp duty or a new land tax.
It was suggested that removing stamp duty would, even with current FHB exemptions being available, further support the market. It was generally agreed that first-time buyers need such relief.
However, despite exemptions being available, some first-time buyers still find it hard to enter the market and if stamp duty was removed then FHB sales would increase as the current or future burden of the tax would not hang over the wider residential property market.
For some, the choice will be difficult.
It’s now well established that a central part of the new policy would involve the choice of an up-front stamp duty or an ongoing annual land tax based on unimproved values.
One view at the meeting was that any land tax, unlike stamp duty could be a universal tax, applied to all classes of property. However, the Treasurer insisted that there’s a need to ensure that people are not worse off and that both options would not in his view be subject to unknown increases. The potential for higher rates in either case in the future was still a concern.
It was suggested that the rate of land tax would be locked-up (like the GST) and, according to the Treasurer, there would be a relationship between government expenditure so that future stamp duty/land tax is not seen as a tax to be easily exploited. The Treasurer suggesting that the annual amount would be ‘triple locked’ in any future legislation.
However, from my perspective I think there is currently a disconnect between stamp duty revenue and where monies are spent on infrastructure.
This year for instance there will be record stamp duty paid in what is now a booming market. But we still see a huge backlog of infrastructure in new growth areas. These are the very areas needing to boost supply, but while they may deliver lots of stamp duty revenue they struggle for basic infrastructure.
I think there’s an obvious disconnect there and perhaps part of the stamp duty reform should directly and visibly support this type of infrastructure.
Land tax affordability
While during the meeting there was concern for the young, and how stamp duty possibly limits opportunities, while older people (some at least) sit on a pot of gold. There were also concerns around how some members of the community young and old, might afford an ongoing land tax, as opposed to a one-off stamp duty.
A key point focused on current low interest rates that might give the government more flexibility for reform, however, more generally we need to reflect the possibility that interest rates will change, even if when and by how much is a question.
Rates in the long-term will increase. A question being what happens when low rates are no longer available and buyers who have opted for land tax see their mortgages increase and they still have to fund a land tax and council rates?
Taking this point further, if a buyer adopts the land tax option so that ‘buying-in’ is easier, and then in later years find it impossible to meet their bill, what happens? The Treasurer was asked – what happens when someone cannot pay? And that looks a very real possibility with retired buyers just one instance of facing shrinking incomes. Could the tax be paid from an estate? The topic of a death duty was mentioned a few times.
However, the impact of higher interest rates was, during the meeting an often-expressed concern that could impact younger buyers in a few years’ time. Land tax affordability was an issue the Treasurer agreed needed careful consideration, avoiding one example from the US state of Florida where re-possessions are common for unpaid land tax.
Is change possible?
However, for any reform to go ahead the opt-in or opt-out options might be required for more than 50-years, and there’s a need to better define the choices that might be made by a live-in buyer versus an investor.
The option of a reduced stamp duty, but one that is universal across all properties, with very limited exemptions, may be hard to achieve. The reality that everyone receives services and so everyone should pay a ‘fair’ share was accepted, making some form of property related tax a foundation of government revenue.
Now that we have the lowest interest rates in history it is the ideal time according to the Treasurer, to introduce change so that the government can help finance to change.
However, in a sobering comment the Treasurer told the meeting that the proposed stamp duty changes might not be 100% (revenue) neutral for 50 years and so this is a really big investment and a big inter-generational change.
The transition period will be difficult. That’s always the case as people make choices as they go, as they appreciate, contribute to and live with different options of the sort being debated. But, over the long-term the wider community will benefit.
The big questions still remain around how to make the new tax fair and workable and how the changes can help make housing more affordable.
Submissions to the review closed on 15 March 2021, so we can, I assume, soon look forward to a more detailed update on this important policy.