Wood Property

Stamp duty on the way out. 🤞

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If you could choose between paying stamp duty (once) or an annual land tax, which one would you pick?

This is not a live option in Victoria yet, but it’s on the table as part of the Victorian Government’s wide ranging inquiry into stamp duty.

Several state governments (and ACT) have either started to wind back stamp duty or are considering it. It is commonly regarded as bad tax. It is a handbrake on efficient housing allocation, a barrier to labour mobility and totally inequitable in its allocation to property buyers.

You can see more views on stamp duty here, here and here

Stamp duty has raked in over $6 billion each year for the last 6 years and in 21-22 topped a whopping $10 billion. That is over 30% of taxes collected by the Victorian Government.

Never has so much, been paid by so few, for so long. (Thank you Winston)

If the inquiry recommends removing or modifying stamp duty, it will also need to recommend tapping new revenue sources.

For a live example, we need to look no further than NSW. They wrestled with these exact issued and changed stamp duty rules.  They asked buyers to choose between paying a one off stamp duty bill or annual land tax. The rule changes included extra provisions for first home buyers.

Whatever changes Victoria adopts, it will cause some short term market ripples. But the more important issue is what will be the longer term impacts of removing stamp duty? Well stamp duty is a tax on property transactions regardless of who actually pays the bill. So if stamp duty was removed you could expect more people willing to transact property more often. Apartments are the most transacted sector in the property market (as a percentage of the property categories), for three reasons.

  1. Apartments are of a lower value to houses so the impact of trading is lower.
  2. They have a higher proportion of investment owners who trade based on financials and not life changes.
  3. Owner occupiers of apartments are younger and their life (and housing) needs change more often.

If you imagine a market with no stamp duty, people could buy a small apartment and build equity in it, then trade up to a slightly larger one and so on. Buying and selling to match their shifting life needs. Buying and selling would not be such a monumental decision as it is now.

Repeated stamp duty costs makes this plan impossible because stamp duty outstrips the equity gain in shorter term holding periods. In the current tax world, people rent longer to save a bigger deposit so they don’t use up their first home buyer exemption on a small apartment. The longer they wait the higher prices go and the harder it is to buy. Then life changes and so their plans change and so it goes on.

Economists agree removing stamp duty would be good for the economy generally. But it would be especially good for the apartment market. It would bring a wave of young buyers into the market, who were free from the biggest cost barrier to buy many times in their property journey.

The government needs to look broadly (including outside the property sector) for new revenue streams. Simply switching out stamp duty for an annual land tax would make the already strained rental market even worse.

If a property investor’s annual return was reduced by way of an annual land tax, they would need to do one of two things.

  1. Pass the land tax on to renters, or
  2. Sell up, which reduces the supply of rental homes and again pushes rents up.

Either way an annual land tax would push rents up which is counter to the government’s drive for more affordable housing.

Let’s hope the inquiry keeps the greater good front of mind. Politics may suggest that given the inquiry was moved by Upper House Liberal Democrat MP David Limbrick, there may be little support in the lower house. However pretty much everyone agrees it’s a bad tax and the next election is not until Nov 2026.

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