The South Australian Government has today launched a discussion paper on the state’s taxation system, calling for interested parties to make submissions.
While the discussion paper makes no recommendations, one tax reform idea put forward is to abolish stamp duty on property transactions (conveyance duty) and replace it with a broad-based property tax of around $1,200 per annum for a median valued home of $410,000.
Conveyance duty (stamp duty on the transfer of real property) is currently levied during property transactions. For a $410,000 dwelling, the purchaser would pay $11,330 plus 5.00% on the excess making a total of $16,830. The Reserve Bank of Australia indicates the median length of tenure is 10 years, hence stamp duty equates roughly to $1,700 a year ignoring compounding, inflation and borrowing costs. For shorter term tenures, a broad-based land tax is favourable, but it could negatively impact longer term owners.
The South Australian Government indicates its objectives for tax reform is to provide enough revenue to deliver high quality services, to encourage entrepreneurship, investment and job creation, to collect revenue as efficiently as possible and to be as stable and predictable as possible.
Conveyance duty is considered a relatively inefficient tax in that effects the decision to buy and sell property, be it trade up or down size. It makes up a significant portion of the transaction costs on a property. Land tax, on the other hand, is considered an efficient tax base as the tax cannot be avoided and will broadly apply to all land including the principal place of residence.
From the South Australian State Government’s view point, conveyance duty makes up a significant 22 per cent of total tax revenue “but it is also highly volatile (annual growth has ranged from negative 20 per cent to positive 42 per cent)” dependant upon the currently irrational property market. As it is a tax on property transactions as well as values, a slow market can significantly impact revenues. This is best illustrated in 2008-09 during the Global Financial Crisis (GFC) as the state’s property market tried to correct before the Federal government intervened with the first home owners’ boost that Treasury reports was designed to bring forward demand and prevent the collapse of the housing market. The report notes conveyance duty collapsed 20% at the time and I’m sure the government is keen to avoid it this time around.
Outside of getting the reforms implemented in time, the real problem at hand is transition mechanisms and time-frames. As recent purchasers have forked out a small fortune on stamp duty, it would be unfair to overnight abolish stamp duty and bring in a broad-based land tax. Proposals under current consideration is to make the broad-based land tax effective from the purchase date of a new property transaction – potentially delaying a wide introduction or to provide credits for recent buyers. The latter makes the most sense if the government is striving for a stable and predictable tax revenue stream.
» Tax Review in South Australia – Government of South Australia, 11th February 2015.