A long road to NSW property tax reform


The promotion of Dominic Perrott from Treasury Secretary to Premier of New South Wales (NSW) refocused attention on his long-term plan to replace stamp duty on real estate transactions with annual land prices.

Perotet wants to establish himself as a reformer. This is one of the key reforms he developed as an accountant, and now that he is prime minister, he is more likely to make progress. policy.

There isn’t even a firm proposal from the government. They are still working on it.

There is widespread agreement among economists that a small annual tax on property value is more efficient than a much larger tax on property transactions.

Transaction taxes can significantly distort people’s decisions about buying and selling, but annual taxes on asset values, if properly designed, have no such effect.

In addition, stamp duty is assessed on a gradual scale and brackets are not adjusted for higher values, so the severity of stamp duty has increased significantly over the decades due to bracket creep.

The government could have adjusted tariffs and brackets to offset this creep, but they preferred to scrape the surge in income.

If someone faces a temporary stamp duty of, for example, 4% on a real estate purchase, it influences the decision to leave or move, choose not to move, and perhaps choose to renovate instead. There are also people.

But no matter where you live in New South Wales, for example, if you face an annual tax of 0.25% of property tax, it will not affect their decisions and they and the economy will benefit from this neutrality. Probably. It’s at least a theory.

Therefore, the transition from transactions to value taxation increases household liquidity and productivity and reduces the cost of buying a home. This is especially important for first-time homebuyers.

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The auctioneer will count down bids during the residential property auction on May 8, 2021 in Sydney, Australia. (Lisa Maree Williams / Getty Images)

Annual taxation of value is also a more stable source of income for the state government.

Stamp duty revenue is notorious for its volatility, as it is caused by volatility in both price and transaction volume and tends to reinforce each other. Such volatility makes budgeting more difficult as governments try to lock in more spending when revenues are skyrocketing and leave a structural deficit when the boom is over.

However, the transition from stamp duty to real estate price tax poses many complications.

Taxes on annual value are more noticeable than one-time taxes paid only at the time of purchase and are often politically risky as they are incorporated into the overall purchase cost.

While annual tax is an ordinary burden paid from disposable income, like the parliamentary tax rate, stamp duty is like the cost of capital, which is taken into account in the overall cost of buying real estate.

New South Wales already has a land value tax. It does not apply to primary residences, but it is always one of the most politically sensitive taxes, so its application is limited to investment and commercial real estate.

The transition from stamp duty to value taxation also raises the issue of double taxation. Purchased properties that are recently subject to stamp duty are also subject to real estate price tax.

Perotet’s plans are designed to address these issues. Details are still under consideration, but broadly speaking, it will allow you to choose between paying stamp duty to real estate buyers or imposing a new annual value tax on newly acquired real estate.

But when real estate moves from the stamp duty system to the value tax system, it stays there forever.

Therefore, for many years, a combination of stamp duty and annual value tax remained. You may have chosen an annual tax when you bought the house, but you don’t pay the annual tax because your neighbor chose to pay stamp duty or bought the house years before the choice became available. ..

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On May 26, 2017, new homes will line up in Moorebank, a suburb of Sydney, Australia. (Jason Reed / Reuters)

This system of two tax systems, which has existed side by side for many years, could bring new distortions to the real estate market.

Also, over the years, government revenues will be very costly. Now that the COVID-19 pandemic has made a huge hole in the budget and pushed debt to previously unthinkable levels, it’s an even heavier consideration for the Government of New South Wales.

Perotet wants the federal government to provide financial support to facilitate reforms, but Treasury Secretary Josh Frydenberg said the state is unique.

The impact on pensioners raises another issue. As they begin paying annual taxes, there will be pressure to seek higher pension compensation, which will be a cost to the federal government.

While other states and territories have shown little interest in participating in the promotion of NSW reform, the Australian Capital Territory has its own 20 with a gradual reduction in stamp duty and a gradual increase in value tax. The gradual transition of the year will take several years.

Stamp duty on real estate transactions is one of the obvious flaws in the tax system that requires reform, and Perotet should be praised for addressing this issue.

But the obstacles are significant, and if change is underway, it’s still a long way off.

The views expressed in this article are those of the author and do not necessarily reflect the views of The Epoch Times.

Robert Curling


Economist Robert Curling is a Senior Fellow at the Independent Research Center in Sydney, Australia. He was Managing Director of the New South Wales Treasury Department from 1998 to 2006 and held positions at the Federal Ministry of Finance, the World Bank and the International Monetary Fund.