Land tax rides again!

Article published 23 June 2023

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Land tax rides again!

Economists insist land tax is better but fall at the first hurdle. Who is going to pay for the transition from stamp duty to land tax?

NO sooner had the new NSW Government ditched the previous NSW Government’s land tax scheme, First Home Buyers Choice, or another land tax proposal reared its head.

The NSW scheme, now abandoned, was a very slimmed-down version of what had initially been envisaged.

Initially, the previous NSW Government wanted to give every home buyer, young and old, the choice between paying stamp duty and land tax. Once a property had been purchased by someone who chose land tax over stamp duty, the property would always be subject to land tax.

For land tax to become universal under this initial scheme would have taken forty or fifty years. It relied heavily on NSW Government borrowing money to cover the revenue shortfall caused by people paying annually amounts in land tax much smaller than stamp duty. This could have worked in the low interest environment over the past decade-and-a-half, but we all know where that environment ended up: in high interest territory.

The latest proposal for a land tax, set out in an article in the Australian Financial Review (pay-walled unfortunately), comes from Robert Breunig. This new proposal is much more dangerous for low-income households because it seems to solve what the previous NSW Government was unable to resolve: how to transition from stamp duty to land tax.

This is how Mr Breunig’s particular land tax would work:

The switch from stamp duty to land tax occurs on a single given day for every property owner, no exceptions.

However, property owners get a credit to the value of the stamp duty previously paid.

This credit is then reduced by the land tax the owner would have paid.

For example, someone bought a house for $500,000 in 2018 and paid $16,000 in stamp duty. In 2023, a land tax is introduced, and the property attracts land tax of $1,500 a year.

Had the land tax been in place since 2018, the owner would have paid $7,500 in total up to 2023. In 2023, the owner gets a credit of $16,000 minus $7,500 equals $8,500.

This credit is whittled down over the next six years to zero. In fact, in the sixth year (2029) the owner has $1,000 credit left and incurs a land tax liability of $500. In the seventh year (2030), the owner becomes liable for the full annual land tax of $1,500.

Mr Breunig obviously thinks this is a very clever idea. The property owner, however, might beg to differ. The owner paid stamp duty in the belief that they would never have to pay again, even if they stayed in the property for twenty, thirty or forty years. Those potential periods have been shortened to five years and eight months in Mr Breunig’s proposal.

CPSA believes that there would be a great many property owners – close to, if not exactly, 100 per cent, in fact – who would think this was one of the worst ideas this century so far.

What happens in Mr Breunig’s land tax proposal is that the substantial cost of transitioning from stamp duty to land tax is no longer borne by government but by  property owners.

Can’t pay? Mr Breunig’s proposal has a solution for that as well, and you guessed it, it’s effectively reverse mortgaging your house. This is the same solution as proposed for aged care funding and Age Pension funding and found to be unworkable.

It’s also unlikely to be very popular with property owners. When they move, they must pay accumulated land tax plus compound interest and might find that they can’t afford to buy a home to replace the one they have just sold.

CPSA confidently predicts that Mr Breunig’s proposal will go no further than the Australian Financial Review.

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