Seven things to know about the stamp duty debate

Stamp duty and tax reform are topics that regularly make headlines and a recent report shares the property industry’s thoughts on both of these issues.

Grant Thornton's The Real Estate & Construction Industry Insights Report, released this month, has found that most participants believe it is imperative for changes to be seen in the sector. This has been the perspective of many industry bodies, such as the REINSW, for a long time.

“The real estate and construction industry is a heavy lifter when it comes to tax,” she Grant Thornton’s global head of real estate and construction, Sian Sinclair.

“This means the industry needs to provide government with clear arguments for a fairer tax system that will improve growth conditions for the sector. Otherwise they won’t get the serious changes required at all levels of government.”

The report was compiled from direct meetings with public and private organisations including developers and owners of commercial and residential property, builders and civil contractors and industry consultants.

Here are seven major points from the report.

Stamp duty plays a significant role as a government revenue raiser

“Too often, governments that need to reduce the budget deficit or increase the surplus look to property as an easy way to raise additional revenue,” the report notes, explaining that it is a significant contributor to revenue in all states.

For any regular Property Observer reader, the uptick in stamp duty revenue windfalls in recent times should be no surprise.

Here’s how much stamp duties contribute to the revenue raising across the states and territories.

Source: Grant Thornton

Stamp duty is widely agreed to have a significant impact on affordability

With stamp duty being a cost that sees the purchaser footing the bill, it is unsurprising that it affects the overall cost.

Within the report, it was seen that the vast majority considered the impact of stamp duty on affordability to be “significant” or “moderate”. Qualitative research undertaken for the study found that there was a consensus that, in fact, while higher income households pay more for housing and related taxes, there was a higher impact on lower income purchasers.

Source: Grant Thornton

They also note claims made by the Urban Development Institute of Australia in March that the various taxes and charges, not solely including stamp duty, account for up to 44% of the price of a new house in some cities.

“Australia’s growing population, along with limited land releases in major urban areas and the cost of bringing new product to market (including taxes, fees and charges applied), continues to put pressure on the affordability of housing in Australia,” the report details.

Geographic mobility and downsizing hindered

Further qualitative research in the report detailed that stamp duty has a negative effect on geographic mobility and adds a disincentive to moving to new job locations.

In total, 98% agreed that property taxes “impacted or distorted the buy sell decisions of homeowners”.

“It was also seen as a contributor to the underutilisation of housing stock, by deterring empty nesters from downsizing to more appropriate housing for their stage of life,” they found.

There are a number of possible options to alter stamp duty

If stamp duty is abolished, there are a number of possible replacements or alternatives as suggested by study participants.

These include:

• Introduction of a reasonable value threshold that stamp duty does not apply below (e.g. $500,000)
  
  
• Replacing it with a GST increase or broadening
  
  
• Further concessions for first home buyers
  
  
• Reducing/restructuring the current property tax rates
  
  
• Lowering infrastructure charges to encourage development
  
  
• Allowing home buyers to pay property taxes over a period of time (land tax based system) rather than up front (Stamp Duty system) the provision of “opt in” scenarios for land tax in lieu of paying stamp duty up front
  
  
• Discounting stamp duty if the property is a primary place of residence

Of those interviewed, they found that the majority wanted to see it abolished. Those that wanted this were also most keen to see the government increase or broaden GST instead.

“While abolition of stamp duty is often on the wish list and historically has been linked to GST, the upcoming review of the federation model means now is the time for the industry to speak up,” Sinclair said.

“The preference to pay more GST over stamp duty is quite remarkable, given GST represents a real cost to residential property developers who, unlike many suppliers are price-takers when they sell their product, working backwards on the market price rather than applying an additional 10%,” she said.

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Federal-level reform is preferable to state-based

As we saw in the first point, each state and territory benefits from the increased revenue that property taxes bring.

The report suggests that this means they are not willing to reduce the revenue base from property tax without a replacement income stream. Considering many of the reforms suggested above would effectively reduce revenue collection, it’s suggested that the reforms will be unlikely unless wider tax reform is supported at federal level.

At present, a white paper on tax reform is due for release next year, with public debate to be an important aspect of this process.

“The business community and taxpayers generally, need to give government the mandate to make some significant changes to our tax system. Until that happens, the government will continue to tinker around the edges of our tax system without effecting any real change,” the report urges.

It is noted that a collective effort, from all levels of government, will likely be needed to address the issue.

A number of people are not sure on what counts as tax or not

Despite the topic’s popularity, it seems that there’s little consistency across Australia as to what counts as property tax.

The research found that the different names applied to the government charges are creating confusion around what counts as a tax. For instance, names such as levy, contribution or charges are not always seen as a tax.

Tax includes a number of levies, contributions and charges, as well as land tax and stamp duty. These latter taxes were those most easily identified.

The report’s qualitative finding was that many do not mind paying property taxes if the revenue is “properly applied by the relevant Government body in providing services and infrastructure, commensurate to the charges.”

Here’s how easily respondents identified different charges as taxes:

Source: Grant Thornton

Property tax is highly considered by investors

According to 91.8% of those surveyed, property taxes must receive consideration by investors when making purchasing or project decisions due to their impact on overall feasibility.

In particular, it was noted that the effect of property taxes on large greenfield projects in early development stage, and financing before the end product is ready for sale, are significant challenges. Another issue was noted to be the level of certainty over how much property tax is payable in order to allow accurate forecasting.

The report found that almost 50% of participants had, at some point, considered not involving themselves in a project due to property taxes and additional costs as a result. Meanwhile, 80% said that property taxes influenced how they structured transactions, which could lead to less than optimal results on exit.

How stamp duty will be treated in next year’s white paper will be of significant interest to the majority of property industry members and consumers.

“Stamp duty has been identified as crippling to the industry, with 80% attributing the inefficient tax to housing affordability issues. Sadly almost half (46%) of those we spoke to admitted to not pursuing a project or purchase opportunity because of the stamp duty costs involved, demonstrating the negative impact on transaction activity,” said Sinclair.

“Tax reform is on the agenda and the statistics in our report show there is a clear mandate for real change. Now is the time to speak up and be heard to ensure inefficient taxes do not continue to impact affordability and stifle the property sector.”