‘Archaic’ Government Cash Grab That Needs To End

It’s a tax that has been described as regressive, inequitable, and inefficient, yet stamp duty on housing transactions remains one of the biggest revenue earners for state governments, despite ongoing calls for its abolition.

As the property boom surged across the nation during the COVID-19 pandemic, state coffers filled with the hard-earned money of homebuyers.

They were buyers who not only had to borrow more as prices skyrocketed, but also had to cover significantly larger stamp duty costs as a result.

For most, that meant topping up already hefty borrowings with the extra tax impost – between 3.4% and 5.7% of the cost of a $1 million property, depending on the jurisdiction.

“Stamp duty is an archaic tax originally created to cover the fees of validating contracts and probates,” was the Tax Institute’s summary in a paper released last October.

“It’s justification in a modern world is questionable at best.”

When he was the New South Wales Treasurer, now-Premier Dominic Perrottet pushed for a significant rethink of the property tax in June 2021.

“Research indicates that each additional dollar of residential stamp duty revenue lowers living standards by 90 cents,” Mr Perrottet said at the time.

“Without stamp duty, the annual incomes of NSW residents could be increased by more than $10 billion in total.”

Why stamp duty is hated

“Stamp duty is one of those taxes that economists hate,” PropTrack economist Angus Moore said.

“There are two reasons. The first is that it’s a tax on moving and it’s a very expensive tax. It has a very significant effect on people’s ability to move when they need to, whether it’s for work or if they’re upsizing or downsizing, and they end up staying in homes that are not right for them.

“So, they may end up commuting further or being in a property that’s too small or too large for their needs.”

Current NSW stamp duty rates

As of 1 July 2021, the following standard transfer duty rates apply:

Property value	Transfer duty rate
$0 to $14,000	$1.25 for every $100 (the minimum is $10)
$14,000 to $32,000	$175 plus $1.50 for every $100 over $14,000
$32,000 to $85,000	$445 plus $1.75 for every $100 over $32,000
$85,000 to $319,000	$1,372 plus $3.50 for every $100 over $85,000
$319,000 to $1,064,000	$9,562 plus $4.50 for every $100 over $319,000
Over $1,064,000	$43,087 plus $5.50 for every $100 over $1,064,000

The other reason, according to Mr Moore, is the extra burden imposed on first-home buyers in particular, even when considering the various concessions and discounts offered by some state governments.

“For many first-home buyers, saving the initial deposit is hard enough but the upfront stamp duty payment then adds a whole lot of extra savings,” he said.

“If you look at buying a home in Sydney for $1 million, the stamp duty is a little over $40,000, which for a young couple is an extra two years of saving.”

So, what’s the alternative?

A broad-based property tax, which would take the form of an annual payment calculated on the unimproved land value of a home, is being considered in NSW as a possible replacement to the hefty one-off stamp duty hit.

Under the proposal, first mooted in the November 2020 budget, there would be a transition from one tax to another over several years, with home purchasers initially being given the option of either paying stamp duty or moving to an annual land tax.

When a progress paper was released seven months later, the bullish Treasurer Mr Perrottet, was effusive about the new tax’s possible benefits.

“In the long run, the proposed reform would lift living standards,” he said.

“It is expected to expand the NSW economy by 1.7%, or more than $10 billion additional annual income for NSW residents. This would provide an extra $3300 of income per household and 75,000 additional jobs.”

Modeling by the Tax Institute found there would be significant advantages to buyers under an annual land tax.

It found that the buyers of a $650,000 home on 500sqm in the outer western Sydney suburb of Mt Druitt would pay an estimated $1300 per year in land tax, taking 18 years before its accumulated cost was more than the upfront $24,457 stamp duty slug.

The buyers of a $2.5 million, 700sqm house in the city’s Hills district would fare even better, with the $3400 annual land tax taking 36 years before it was greater than the $122,067 stamp duty payment.

But it’s apartment buyers, with much smaller land size under consideration, who will be the big winners under the proposal.

A two-bedroom apartment in the inner city worth $730,000 would attract $28,057 in stamp duty right now, but only $730 per year in land tax, meaning the owner would have to live there for 39 years before they paid more.

Michael Fotheringham, managing director of the Australian Housing and Urban Research Institute, said that the land tax proposal would be beneficial.

“For empty nesters and full nesters, it will make moving more efficient and an increase in mobility in the housing market is a good thing,” Mr Fotheringham said.

“As more housing stock moves on to the market, it will help that supply issue to some degree. Not as much as new construction, but it certainly helps.”

But will change happen?

The land tax proposal in NSW was red hot last June, but there has since been some cooling in enthusiasm since then.

The main problem is that letting buyers opt-out of stamp duty would deliver a significant short-term hit to the state’s budget.

The revenue earned by stamp duty in NSW was $9.379 billion for the 2020-21 financial year, which was $1 billion more than forecast, making it the state’s biggest earner of tax revenue, ahead of payroll tax.

New Treasurer Matt Kean has indicated that some Commonwealth assistance would be needed for the land tax model to be viable in the short-term.

Other states are also watching and waiting to see what carrots could be dangled for them to ditch their expensive stamp duty models.

Craig Bright, Canberra-based board member of the Real Estate Institute of Australia, who has closely monitored an ongoing transition from stamp duty to land tax in the ACT investment property market, agreed that federal help is needed.

“The Commonwealth could subsidize the states for the short fall when they make the change,” Mr Bright suggested. “You can’t just cut off 20% of your revenue without ramifications.”

Mr Moore said a complete review of the federal/state tax relationship may bring a more compelling solution to stamp duty.

“Economists like land taxes because they’re relatively efficient,” he said. “But they can be difficult to enforce.

“The beauty of stamp duty is it’s collected upfront, but with land tax you’re sending a bill once a year and not everyone will have the capacity to pay it.

“I’m fairly agnostic as to what is the right way to replace stamp duty.

“It’s been 20 years since we looked at the federal/state tax relationship and it may be time to look at other options for how we set up the tax system without stamp duty.”