Why does the government bite the hand that feeds them - Investors need Tax Relief

Why does the government bite the hand that feeds them - Investors need Tax Relief
Why does the government bite the hand that feeds them - Investors need Tax Relief

Property Investors Require Tax Relief Now.

The Property Industry has been the Achilles heel of the Australian economy since the 1800’s, Australian property prices grew on average 0.5% per year from 1890 to 1990 after inflation and for the vast majority of Australians, purchasing a property will be their largest investment in their lives.

So here lies the question, why since 1851 has the government introduced so many new tax laws, so many changes and you simply require being an accountant, a tax expert and property lawyer rolled into one to make any sense of all these changes. 

We all enjoyed listening to Kerry Packer famous quote, when he was questioned for trying to evade tax.

Kerry Packer Quotes

I pay whatever tax I am required to pay under the law, not a penny more, not a penny less... if anybody in this country doesn't minimize their tax they want their heads read because as a government I can tell you you're not spending it that well that we should be donating extra.

For the average Australian, this simply causes greater confusion and for any foreign investor, the tangled web makes; doing business in Australia too difficult.   They simply look to invest in other countries such as America, Canada and the UK, as the top three countries Australia competes with on the Global Property Investment footprint.

From 1990 to 2017 property prices grew far greater than 0.5% per year, due to vast population growth was the reason for pushing property prices higher than we had paid for in the years previous.  Also relaxing credit guidelines, allowed for borrows to purchase properties with a 10% deposit. The Productivity Commission Inquiry Report No. 28 First Home Ownership (2004)

"That Growth in immigration since the mid-1990s has been an important contributor to underlying demand, particularly in Sydney and Melbourne.”  

Projections for population growth in Victoria, was to exceed 10 million people by 2051.

House prices rose by an average of 64% in Sydney and Melbourne in the decade from 2004 to 2014. At the same time foreign investment proposals in developed real estate rose by almost tenfold.

The numbers are hard to find and a little rubbery, but our best econometric estimate is that about one-quarter of the growth in house prices in Sydney and Melbourne can be attributed to foreign investment.

If the foreign investment had been steady over the period, average house prices would have grown by about 50% compared with the actual growth of 67%.  The hype about Chinese buyers driving up house prices appears to be overstated – at least in terms of the effect on average house prices – there may have been more significant effects in certain locations.  The Parliamentary Inquiry essentially came to this conclusion. It found that there is no accurate data on foreign investment in Australian real estate and therefore “no-one really knows how much foreign investment there is in residential real estate”.

Why did Melbourne, Australia attract so such a spike in population?

The Australian economy expanded by 1.9% in chain volume terms in 2018-19, the 28th consecutive year of economic growth.  The easing growth in household consumption was driven by discretionary spending, which declined from 3.3% in 2017-18 to 1.4% in 2018-19. Purchase of vehicles fell for the first time since 2008-09, while spending on hotels, cafes and restaurants (1.6%) and furnishings and household equipment (1.1%) were subdued.

Future threats to the sector include a forecast substantial undersupply of dwellings entering the market in FY19/20 and FY20/21, weak purchasing power due to low wage growth, a reduction in the availability of finance for purchasers and the significant retreat of investors from both the greenfield and apartment markets

State and Local Governments need to continue delivering planning and development approvals and essential infrastructure to ensure they are available to meet real demand and to enable the development industry to deliver a robust pipeline of new housing, jobs and economic value for Victoria.

Here is a timeline of taxes on the property sector alone since 1877: 

  • 1877 - Land tax is first imposed to break up large holdings in Victoria. Land tax is administered by the Chief Secretary's Department until 1884 and then by the Department of Crown Lands and Survey.
  • 1895 - Victoria introduces income tax on all income derived by a person and on the revenue of companies. An Income Tax Office is established in the Treasury to administer the new tax.
  • 1930 (The Great Depression)  - The Victorian Government passes legislation imposing additional income tax and stamp duty on wages to provide for the relief of unemployment.
  • 1992 - The Stamp Duties Office and State Taxation Office merge and the position of Commissioner of State Revenue created.
  • 1999 - The Inter-Governmental Agreement on Federal Financial Relations is signed by the Commonwealth and the States, affirming their commitment to a new national taxation system including the elimination of a number of inefficient taxes including:

Financial Institutions Duty,

Stamp Duty on marketable securities,

Debits Tax

Stamp duty on non-real non-residential conveyances

Stamp duty on leases

Stamp duty on mortgages, bonds, debentures, and other loan securities,

Stamp duty on credit arrangements, installment purchase arrangements, and rental arrangements,

Stamp duty on cheques, bills of exchange and promissory notes

  • 2000 - A national scheme is established for the payment of a First Home Owner Grant to encourage and assist first homeownership and to offset the effect of the GST on homeownership.
  • 2001 - Financial institution's duty and stamp duty on quoted marketable securities and non-residential leases are abolished.
  • 2004 - Stamp duty on mortgages is abolished.  The Victorian Government passes legislation to introduce an additional payment for first-home owners known as the first home owner bonus.
  • For contracts entered into on or after 6 May 2008 - The rate of duty charged is on a sliding scale down from a top rate of 5.5% for property valued at more than $960,000 to a base rate of 1.4% for properties valued at not more than $25,000.
  • 2009 - The Commonwealth Government announces it will provide first homeowners with an additional payment known as the First Home Owner Boost. The Victorian Government passes legislation to administer the new initiative on behalf of the Commonwealth.
  • 2010 - The Victorian Government imposes a Growth Areas Infrastructure Contribution (GAIC), which is a one-off financial contribution on certain land in the growth areas of metropolitan Melbourne. The GAIC is designed to aid State infrastructure in the growth areas.
  • The First Home Owner Boost ceased to apply for contracts entered into on or after 1 January 2010.
  • 2012 - The Victorian government reformed the land rich duty provisions by adopting a landholder duty model from 1 July 2012.  
  • 2015 - The Victorian Government introduces a Foreign Purchaser Additional Duty for foreign purchasers who buy a residential property in Victoria. The additional duty applies to contracts, transactions, agreements and arrangements entered into on or after 1 July 2015.
  •  From the 1st of July 2016, 
  • "Foreign buyers will have to provide citizenship and visa details, as well as Foreign Investment Review Board clearance, through the stamp duty process." "The ATO will match data to ensure foreign buyers have paid a $5000 fee for any property sold for less than $1 million, and $10,000 for properties over $1 million."
  • Victoria will raise its existing 3 per cent stamp duty surcharge and 0.5 per cent land tax surcharge to 7 per cent and 1.5 per cent respectively on July 1
  • 2018 The Victorian Government introduces a Vacant Residential Land Tax (with effect from 1 January 2018) to apply to homes in inner and middle Melbourne that are vacant for more than six months in the preceding calendar year.

The Government have first-hand crippled high density to medium dwellings around our major suburbs.  The very people, who contribute approx. 10% of total GDP to the economy, are the ones that are penalised the harshest, without any reprieve.

The softest growth in household loan liabilities in over 25 years

The value of land and dwellings held by households was 2.9 times the value of household borrowing in 2018-19, decreasing from 3.1 in 2017-18. The value of land and dwellings owned by households fell 3.8% (-$265.1 billion) to $6,687 billion, the first decrease since 2011-12, reflecting the declining residential property prices throughout the year. This was driven by falls in the value of land (-$326.0 billion), while the growth rate of the value of dwellings (3.1%) was the softest since 2011-12. The tighter lending environment and the weak housing market in 2018-19 also impacted the demand for loans by households. Household loan liabilities grew 3.8% ($85.7 billion), the softest growth rate since 1991-92.

The Federal government has done a great job to provide financial stimulus support for businesses and the unemployed.  The major financial institutions have been wonderful in providing mortgage relief for property owners.  

This would be the opportune time to provide stronger incentives targeting ‘Property Investors’ to prevent the brute force of Covid-19: sweeping through the economy that upheld this nation, the property industry.

Here are my personal suggestions.

  • - Only $5,000; Stamp Duty payable for any new dwelling purchased off the plan for Australian Residents as owner occupiers and investors.
  • - 50% off all land tax, as the ratio to rates payable is disproportionate
  • - Maximum of 20% income tax, from Rental Income on all properties
  • - Foreign Buyers, to pay 5.5% of the dutiable land value, on all new dwellings 
  • -  FIRB approval on Property to be 40 days.
  • -  On established dwelling Foreign Buyers pay 5.5% of the sale contract price.
  • - Deposits paid to purchase investment properties are 100% tax deductable.
  • -  Capital Gains Tax, to be exempted for all properties purchased prior to 1999.

The economy requires urgent stimulation; we cannot lower interest rates any further.

We need to act swiftly, responsibly, and proactively today, to avoid a catastrophic disaster.  Let’s make doing business in this great country easier.

 

Anthony Ferraro

Anthony Ferraro

Anthony Ferraro has previously been an Exclusive Residential Projects Agent on over $3.8 billion worth of residential projects in Melbourne. Opening 15 new desks in China, Hong Kong, and South East Asia since 2011. Working exclusively with Publicly listed companies and the largest Commercial Real Estate Agencies in the World, listed as Forbes 500 Companies. Since 2018, he has been involved in Acquisitions of New Commercial Assets and Private Lending to Private Families.

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