Replacing stamp duty with land tax needs debate: REIV

With the ACT government moving to replace stamp duty with land tax, the Real Estate Institute of Victoria (REIV) has weighed into the discussion highlighting a 2012 report by the Australian Housing and Urban Research Institute (AHURI), which shows replacing the current system of state-levied stamp duty with a land tax in Victoria would cause the owners of more expensive land closer to the city to pay a much high proportion of the tax burden.

The AHURI report suggested that properties within 20 kilometres of Melbourne CBD, which currently pay 61% of the stamp duty bill, would pay 84% of a new land tax

The biggest shift in the tax burden would be for those properties within 10 kilometres of the city. The aggregate tax bill for these properties would rise from 29% under stamp duty to 46% under a land tax.

Conversely, those properties built on cheaper land further out from the city would pay less tax.

For properties built on land 20 to 30 kilometres from the CBD, the portion of the tax bill would fall from 17% to 10%, while in the next band (30 to 40 kilometres out from the city) the burden would fall from 8% to just 2%.

Source: REIV (from AHURI report)

According to the REIV, there are a range of impacts to consider from such a shift in tax policy.

“One interesting idea suggests that shifting the burden to the more expensive suburbs would encourage greater turnover in outer suburbs, where the majority of transactions occur,” says the institute.

However, it also notes “significant concerns” in replacing stamp duty with land tax, including “a projected drop in land values; the need for the government to run dual taxation systems; and the issues faced by the asset-rich but cash-poor in meeting the new annual bill”.

“Expect to hear more on this debate over the coming years,” says the REIV.

The recommendation to replace stamp duty with a land tax levied on all land came out of the 2007-2008 Henry Review.

It imagined a “municipal rates-type bill” with the review also noting there would be “significant transitional issues, as government could not charge land tax on a property where stamp duty had already been paid”.

The Henry Review recommended that:

“Existing land tax arrangements should be replaced, subject to a long transition to slow valuation effects and facilitate landholding adjustments, by a land tax applying to all land regardless of use.

• The rate scale would be based on the value per square metre of land.
• A unit value threshold would effectively exempt most land in agricultural use.
• Most residential land could be subject to tax of about 1%. A higher rate may apply to the highest value land (per square metre).
• Land tax revenue would also replace stamp duties on land transfers.”