Elite AgentOPINION

Stamp duty: A bad tax that has to go

You have to look long and hard to find a notable figure who had a good word to say about taxes. One such person was US Supreme Court Justice Oliver Wendell Holmes Jr who in 1927 declared, “Taxes are what we pay for civilised society”. 

There’s plenty of truth in that statement, but who pays and how much is a fraught matter that keeps accountants in business and politicians in a perpetual juggling act to keep the wheels of government turning while appeasing those with a less civic-minded view of taxation, and most importantly for them, keeping their job. 

The thing to remember about our tax system is that it is not meant to be fair but structured around the capacity to pay. Hence, we have a progressive tax system where, in theory, the more you earn, the more you are taxed – regardless of the share of government-funded services you access. 

It’s a concept that by and large we accept while doing all we legally can to reduce our individual tax burden. 

But stamp duty is another matter. It’s not only unfair but also inefficient and no longer fit for purpose. 

First strike against it is the burden it places upon first home buyers, already struggling to save a deposit for homes that once again are rising in price at frenetic speed in this current upswing fuelled by a listings drought.

Despite the various incentives that exist across the country, FHBs still have to stump up a big chunk when they can least afford it. 

It also serves as a disincentive to older home owners wanting to downsize and cash out to help fund a retirement with some degree of comfort as the cost of transition is so high.

This stamp duty-driven inertia results in many three, four and five-bedroom houses on large blocks best suited to large families often being occupied by two people with only the occasional return visit of an adult child or grandkids. 

But the argument that should convince our legislators that stamp duty’s time has passed is its unreliability.

The property downturn took a sizeable chunk out of government revenues and no Treasurer likes to deliver a Budget where the money falls short of forecasts. 

The 2019-20 NSW Budget Statement set out the dilemma concisely: “The volatility of transfer duty revenue is a significant fiscal challenge for NSW. During the property market boom, transfer duty grew to be the State’s largest tax, representing 31.4 per cent of tax revenue in 2016-17. The decline in the property market over the past 18 months has seen forecast transfer duty fall to 21.6 per cent of tax revenue in 2019-20. Since the 2017-18 Budget, the four-year forecast for transfer duty has been reduced by $10.6 billion.” 

The Budget Statement went on to forecast residential stamp duty to grow at an annual average rate of 8.8 per cent over the four years to 2022-23, with a return to average transaction volumes on the back of interest rate cuts and relaxed credit restrictions. Price growth was forecast to keep pace with inflation. 

Well, we’ve seen the return of buyers but several of those predictions are not playing out as planned.

Transaction volumes remain constrained and soaring prices in many areas bear no relation to our moribund inflation rate. 

The next State Budget is not until June and the current high prices may yet convince vendors to take a leap of faith.

But if I was Treasurer, I’d rather be planning a Budget less dependent on the boom-bust property cycle that is increasingly becoming the norm in Sydney.

Whilst the dynamics are different across the country, the problems with transactional taxes on real estate are the same. 

It’s clearly on the mind of NSW Treasurer Dominic Perrottet, who in August last year established an independent review of the State’s revenue system, looking for a better way to integrate state and federal taxes

At a forum on the topic held at NSW State Parliament on Monday, former Treasury Heads Ken Henry and Martin Parkinson didn’t mince their words on the subject of stamp duty. 

It’s a “terrible” tax, “a bad tax”, uttered Henry while endorsing Perrottet’s efforts to get rid of it.

Both Henry and Parkinson see salvation in a land tax that would deliver greater certainty of income to the Government and ultimately be fairer to everybody. 

The challenge lies in finding an acceptable formula for its introduction so that those who have paid the big, bad stamp duty don’t get hit with a new land tax on their property. 

On the face of it, the suggested exemption of farming land and existing home owners, with the tax phased in over 15 years, should allay concern about government double-dipping.

However, this creates obvious budget issues during the transition which would be reason enough for the Government not to be keen. 

Of course, Henry has been down this path before, having recommended abolition of stamp duty in favour of land tax in his 2010 review of the Australian Tax System.

And as we all know, after two years of consultations and report writing, the review was simply left to gather dust. 

But there is a reformist zeal about the Berejiklian Government that suggests this time things might be different.

The Treasurer has as good as said he wants to break the government’s addiction to stamp duty. 

With another three years of its four-year term still to run, it would be great to see the state government choose this moment to be bold, ditch the stamp duty and introduce a land tax with two years up its sleeve before an election, to let the backlash settle down. 

However, given that there is nothing more perishable than ideals in the lead-up to a close election, I suspect that the status quo will be maintained, which will be an opportunity lost. Again. 

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Andrew Cocks

Andrew Cocks is the Executive Director of Richardson & Wrench.