Stamp duty must be reviewed

The topic of stamp duty paid on property transactions is never far from the minds of anyone who is active in the residential housing market. It’s both a big source of revenue for state governments and at the same time a lever they also use to manipulate and stimulate activity in the housing market.

I also like to suggest that it is a tax that needs structural change, and I am far from alone in this view. Currently Australia has some of the highest property taxes in the world, and we do not compare well with similar economic like the USA, New Zealand and the UK.

This is not an arbitrary deliberation and so as a first step I would like to start this series of posts by constructing a framework around this always-newsworthy subject.

Stamp duty for home buyers is also it would appear an unpopular tax and by coincidence a readers’ panel survey in the Sydney Morning Herald (April 21-22) showed that 64.5% of respondents thought that stamp duty should be waived for all first-time buyers.

A quick look at New South Wales

There is of course a current concession in NSW for first time buyers that will run until June 30, 2012, and the state is not alone in making concessions. I will return to such incentives as we move through this topic.

But first a brief look at the context of stamp duty.

Historically, stamp duty was literally a fee charged to cover the administrative cost of simply stamping and filing documents when an interest in property of any kind was transferred.

But that is now longer the case and it is a duty that in 2010-11 contributed an estimated $4 billion to NSW state revenue along with land tax, which will raise another $2.3 billion.

At an individual level the duty normally payable on a home valued at $650,000 would be $24,740 and on a home valued at $1 million, which is not an uncommon sale in Sydney, the duty would be $40,490. Not paltry amounts of money and even less so for a first-time buyer in a market where affordability is constantly a hot issue.

When the duty is calculated in NSW it is based on the value of the improved value of the property, including off-the-plan sales, and this includes any GST reflected in the price. And so it is the current market value of the property and must be paid within three months from the exchange of contracts.

Stamp duty rates on property transactions in NSW have not changed since 1986, when the median house price in Sydney was $87,000 and as was generally expected, rates were not adjusted when the GST was introduced.

And while the tax is a progressive tax, since 1986 land values and the cost of construction, alongside almost every other input cost in the housing market have increased, and as a direct result stamp duty has also increased.

A duty with so many variations

I have already made a brief mention of the stamp duty concession in NSW that runs until June 30, 2012, but this is only one of a long list of rebates, discounts and concessions on offer that vary between all of the states and territories.

While there is no reason that all jurisdictions should have identical policies, I suggest there is reason to ask a simple question at this point: if stamp duty in its various forms requires so much manipulation, is it time for major change in how and at what rates property stamp duty is applied?

After all at least since the introduction of the GST the industry and governments have been dancing around this subject avoiding real change, and it appears reform is necessary.

Let’s start with off-the-plan sales

In the project marketing matrix off-the-plan sales lay at the foundation of activity and they determine the success of most projects. How stamp duty is treated (notwithstanding various concessions) between NSW and Victoria is one point worth making the comparison.

In NSW the duty is normally payable on the full contract price, which is the improved value of the completed project.

In Victoria there is a concession when you purchase property off the plan. In its simplest application the concession allows a deduction from the contract price for the cost of construction, which occurs on or after the contract date.

What this means is that effectively buyers only pay duty on the improved value of the land and the non-deductible costs and completed construction including GST as at the contract date.

In contrast to NSW and other states, the off-the-plan value in Victoria is the value an apartment would sell at the contract date on the open market as if construction had not commenced.

This is only one example of two very different applications of stamp duty. In a competitive market this can have an impact and for investors can make one market more or less attractive.

There is also much speculation when states vary their incentives with states at times moving to more or less match the incentives on offer. And so, for example if one state offers an exemption its neighbour usually follows.

The link between stamp duty and the need for incentives

Among the many forces impacting price, incentives are one of the key factors to be taken into serious deliberation as part of the marketing mix. And here again many of these incentives will be influenced even if indirectly by the impact of stamp duty.

Government incentives have been wide-ranging and they are frequently seen as ways of boosting economic activity. For example in late 2008 when the then Rudd government introduced its boosted first-home buyers’ grant of $21,000 and various state governments then also added further very valuable incentives markets required urgent stimulus.

These incentives were not new and it has further been suggested that the first-home buyers should in fact be closer to $30,000 and that all stamp duty on homes below $1 millionshould be removed altogether.

Sporadic stamp duty discounts and incentives, even when some appear to be almost semi-permanent do, I feel point to the need to basically review stamp duty as a whole.  The Henry Review of tax has recommended already scraping stamp duties in favour of a new broad-based land tax.  The report suggests that this move could possibly reduce land prices by between 6% and 10%.

At this stage I think there is evidence that stamp duty is no longer the best way to raise revenue form an already heavily taxed property sector and struggling home owners. I will continue to look at this complex topic as it impacts different markets, and also look at how developers are offering their own incentives, which are at times aiming to at least partly neutralise the impact of high stamp duty.

Peter Chittenden is managing director for residential of Colliers International