Tax Policy

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The State Taxation Acts Amendment Bill 2019 which seeks to extend the tax on development agreements was introduced into the Victorian Parliament this week.
The Bill contains a major change to the ‘economic entitlement’ provisions of the Victorian Duties Act 2000 that will have a significant and adverse impact on many property developers and the property market more generally, according to tax lawyers.
The Victorian government will seek to boost its slumping stamp duty receipts by extending the tax on development agreements.
It will no longer let developers avoid paying stamp duty by entering into an agreement with the landowner to develop a site without actually purchasing the land.
Many standard development arrangements that are not caught by the current duty rules will be subject to duty under the new provisions, Craig Whatman at Pitcher Partners says.
"This major change was not announced by the Treasurer and is not directly referred to in the Budget papers, despite the change effectively creating a new head of duty liability under which significantly more development arrangements will be subject to duty," he said.
Pitcher Partners is currently working with the Property Council to discuss the impact of these proposed changes on the development industry and the market more generally with both the Government and the Opposition.
The Duties Act 2000 currently contains complex ‘economic entitlement’ rules within its landholder duty provisions, which can apply to development agreements entered into between a private landholder (company or unit trust) and a developer. These rules are unique to Victoria.
Under a typical development agreement, the developer will be entitled to charge the landowner for the development costs incurred and might be entitled to a margin on those costs and/or a share of the profit derived from the development.
The profit component of the developer’s remuneration falls within the definition of ‘economic entitlement’. That definition also includes participation in the dividends or income of the landholder, participation in the income or rents derived from the land holdings of the landholder, or participation in the capital growth or proceeds of sale of the land holdings.
Under the current rules, provided the total economic entitlement(s) of the developer equate to an interest of less than 50%, duty is generally not payable on the arrangement.
For example, if a development agreement entitles a developer to recover the development costs incurred plus receive a 45% share of the profit derived from the development, the developer should be able to proceed without paying duty on the arrangement under the development agreement.
The Bill almost completely re-writes the economic entitlement provisions.
A new set of economic entitlement rules will be introduced into the transfer duty provisions, which will dramatically broaden the duty net and result in a wider range of land development arrangements being subject to duty.
The key change is the removal of the 50% threshold for the interest acquired under the economic entitlement(s).
Taking the example above (where a developer enters into a development agreement under which they are entitled to a reimbursement of development costs plus a 45% share of the profit), if the value of the relevant land is $30M, the developer will now be faced with a duty liability of at least $742,000, which could increase to $1.65M if they are deemed to acquire a 100% beneficial interest in the land.
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j.ballantyne1990-6AQqhLzZaK

Victorian Treasurer seeks to close property developer stamp duty loophole

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Despite the rejection of Labor's dangerous negative gearing tax experiment, there is no doubt property owner occupiers and investors face the prospect of an uncertain policy horizon.
Inevitably there will be higher taxes and fewer concessions in the years ahead.
All Federal governments, Coalition or ALP, along with state governments and local councils have become over reliant on the revenues from the property owning class.
Despite the continuing price downturn, recent ABS data highlighted their dependancy. Total NSW property tax revenue in 2017-18 was $8.3 billion in NSW.
Across Australia state and local governments collected more than $30 billion in taxes in 2017-18 – which was $9 billion higher than five years prior.
Cameron Kusher from CoreLogic did some analysis indicating it was five percent higher over the year, slightly slower than the eight percent prior year increase.
Land taxes ($9.153b) increased nine percent over the year and municipal rates ($18.4b) were up four percent.
Local government relies exclusively on property taxes, while state governments secure around 14% of their tax revenues from property.
These figures don’t include the property’s contribution through payroll taxes, and the Federal government's company tax, capital gains and GST.
As taxes such as stamp duty are inefficient, restrictive, and responsible in part for boosting housing prices, there's likely to be the need for comprehensive reform.
This will likely see a wider net of revenue raising across all property owners.
Presumably any reform will need to be discussed away from heated election campaigns seeking a bipartisan approach to come up with not just the right policy, but genuine grandfathering and the best time for introduction.
The recent campaign saw Bill Shorten attacking “vested interests” waging a “scare campaign” against his negative gearing policy pinpointing "real estate agents defending their commissions.” 
Unlike the subdued criticism during the 2016 boom time election, the Shadow Treasurer Chris Bowen hit huge headwinds given the property market confidence was in decline.
Commentators including Peter Switzer were loudly suggesting the policy had the potential of sending property prices off a cliff on its January 2020 introduction along with seeing rents rise for tenants.
Mr Bowen's comments around negative equity didn't assist his case.
Defending the plan to scrap negative gearing entitlements for many would-be investors, Mr Bowen spoke on his own brush with negative equity.
“I mean sometimes lots of people go into negative equity when the housing market does fall," Bowen said.
“I remember when I first was in the housing market I went into negative equity for a while. You look at it carefully, but unless you actually sell, then you haven’t actually lost any money. The market does come back.”
Bowen had bought at Smithfield, in Sydney’s west, paying $470,000 in boom time May 2003. It was at the market peak, ahead of the 2004 crash. By mid-2004, Bowen was busy building a two storey home.
His negative equity comments were picked up by commentators as having “dubious logic," but Bowen dismissed the backlash saying homeowners were concerned their children and grandchildren got a fair go when they turned up at auctions and competed with investors.
The deputy Opposition leader Tanya Plibersek suggested first-home buyers needed to be shielded from investors buying their “30th investment property.”
It vastly overstated the investment landscape as 70 per cent of Australians who negatively gear own just the one property.
According to the Australian Taxation Office, less than one percent of the nation’s 1.3 million negatively geared investors own six properties or more.
This article first appeared in The Daily Telegraph.
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jchancellor-FAypfDUnLy

Why Australian home owners still face higher property taxes?

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GUEST OBSERVATION
Perhaps the most woefully misunderstood economic issue of the election campaign has been negative gearing.
I’ve been baffled by the number of times I’ve read commentary by otherwise thoughtful people describing negative gearing as a distortion to the property market – as a rort we need to crack down on.
But as someone who knows a bit about the economics of taxation, I can say that simply isn’t true.
Negative gearing is a natural, orthodox and proper feature of any market for investment. And allowing negative gearing to be tax deductible is an essential component of an efficient tax system.
Negative gearing isn’t an account in the Cayman Islands
Negative gearing is a funny term. If you search online, you won’t find the term used in most parts of the world. Not because it’s not allowed, but because the term makes it sound grander than it is. In reality, negative gearing is nothing special – it’s boring and conventional.
If it didn’t have a fancy name, perhaps so many column inches wouldn’t have been wasted writing about it. And maybe we wouldn’t have cast it as a villain that must be slain.
When you buy an asset (such as a home), you bear costs (such as interest) in exchange for two types of return: cash (such as rent) and a rise in value (called a capital gain).
To tax the entire return, we should add up the rent and capital gain over the life of the asset and deduct the interest, maintenance and depreciation expenses.
The capital gain might not be achieved for years – not until the asset is sold, so the total might come out negative for some years while the interest and other expenses exceed the rent received (that’s all “negative gearing” is).
Ordinary people do it
This needn’t mean you’re a wild speculator. With a 20% deposit, 4% interest rate and 3% annual rental yields seen in Sydney recently, you’d be running a loss until you sold.
Investors should be able to deduct this loss from their other income, or carry it forward to future years if they don’t have income that year.
This is completely orthodox economics. It ensures tax applies equally to the upside and downside of an investment (or it would, if the eventual capital gain wasn’t only half taxed – more on that later).
Restricting this will depress investment. Fewer investors will buy investment properties and those without the ability to negatively gear will spend less on maintenance and the like.
Fewer buyers of homes will mean lower prices for homes. How much lower is a <a href="https://theconversation.com/confirmation-from-nsw-treasury-labors-negative-gearing-policy-would-barely-move-house-prices-116736" target="_blank">matter of debate</a>.
Removing it could push prices down, and up
On the other hand, in order to support the building of new homes, Labor will allow investors in new homes to continue to benefit from negative gearing, outlawing it only for new investors in existing homes. That’ll push up the price of new homes, and encourage the building of more new homes than are needed.
Some have blamed negative gearing for house prices that are far higher than they should be. While there’s no good evidence on that, it’s surely true that prices are higher with negative gearing than without it.
But rather than being the root cause of the housing affordability crisis – of prices that are higher than they should be – negative gearing is really more of a catalyst.
It’s an enabler rather than a problem
The real culprit is the generous 50% discount on the taxation of capital gains. It means that while losses can be written off at the full tax rate, the eventual gain is taxed at only half the full rate.
Winding back the capital gains tax concession was recommended by the <a href="http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm" target="_blank">Henry Tax Review</a>, was hinted at in the Treasury <a href="https://treasury.gov.au/sites/default/files/2019-03/c2015-rethink-dp-TWP_combined-online.pdf" target="_blank">tax discussion paper</a> commissioned by Coalition Treasurer Joe Hockey, and has been <a href="https://www.alp.org.au/negativegearing" target="_blank">adopted by Labor</a>.
The focus of taxation when it comes to housing should be on neutrality – that decisions of whether to invest in housing are just as they would be if there were no taxes. A lower capital gains tax discount would come closer to doing that. Then negative gearing could stay.
The goal of tax policy should be neither to support nor depress house prices, but rather to let the market evolve on its own. Negative gearing can be part of that.
Steven Hamilton, Visiting Scholar, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University.
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/election-surprise-negative-gearing-isnt-a-rort-but-something-else-is-117247" target="_blank">original article</a>.
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