The New Daily – 15 June, 2015

By James Fernyhough

http://thenewdaily.com.au/money/2015/06/15/meteoric-rise-stamp-duty-explained/

Property tax may have gone completely nuts, but the Property Council’s solution is even nuttier.

On Monday, the Property Council of Australia released some figures that, on the face of it, were pretty shocking.

Over the past 20 years, they found that stamp duty on the average home in Australia’s eight capital cities has risen by a staggering 660 per cent.

To put that in context, median house prices across those eight cities have only risen by 440 per cent, while the cost of consumer staples has risen by just 167 per cent.

In other words, it’s an absurdly high rise, and clearly signifies something has gone very wrong. The Property Council’s solution, however, was equally absurd: abolish stamp duty altogether.

There is no way on earth that state governments would agree to that, given stamp duty is the most lucrative tax that they can levy directly. It would be like the federal government abolishing income tax.

In Victoria, for example, property tax accounted for 41 per cent of tax collected in 2013-14, while in NSW it accounted for 31 per cent (not including GST).

Nevertheless, the Property Council has highlighted a real problem which demands attention.

How stamp duty works

Stamp duty is the tax you pay to the state government when you buy a house.

How much varies from state to state. If you bought a house in Sydney for $880,000 (the median price) you would pay the NSW government $35,090. In Melbourne, the median house would cost you $32,282 in stamp duty, while in Perth, you’d pay the WA government $16,590.

It’s a lot of money. And given you will most likely pay for it with your mortgage, it also attracts interest.

It also gets proportionally more expensive the more your house costs. In Victoria, stamp duty on a house worth less than $400,000 is five per cent. Over $400,000 it goes up to six per cent.

In NSW, properties under $300,000 are taxed at 3.5 per cent; while properties between $300,000 and $1 million are taxed at 4.5 percent.

Bracket creep

This is where bracket creep comes in. As median house prices rise, more and more people on average incomes move into the higher tax bracket, simply because houses are more expensive. They themselves are no better off.

This is extremely unfair, because not only must home buyers spend more of their income as house prices rise, but they must also pay proportionally more tax.

As The New Daily has explained previously, bracket creep is a sneaky way of raising taxes without actually doing anything.

Where does the money go?

The money raised through stamp duty goes into the state coffers and is used to fund state programs such as education, infrastructure and healthcare. These services are expensive, but they are also vital, and the population demands them.

The Property Council recognised this, and recommended in place of stamp duty the federal government raise the goods and services tax (GST) to 15 per cent. But such a move would likely be very unpopular.

As the peak body for the property sector, the Property Council wants property to continue to be a lucrative sector, and that means keeping property prices high. By cutting out tax paid to the government, the property sector wouldn’t be losing a cent. If property prices did drop as a result (and there’s no guarantee of that), it would be the state coffers that would take the hit.

However, another strategy for pushing down property prices – abolishing negative gearing – would hit the private sector, as it would discourage investors from paying inflated prices for investment properties. It is no surprise then that the Property Council supports negative gearing.

Hitting the poor

Abolishing stamp duty altogether would hit the poor the hardest, as it would either reduce the quality of state-provided social services, or increase the cost of consumer goods through a higher GST.

A more targeted approach would be, first, to solve the bracket creep problem by raising tax brackets; and second, to introduce stamp duty concessions for first home buyers.

The latter approach is already in place in some form in every state and territory in Australia.

First home buyers in Victoria, for example, who buy a house worth less than $600,000 only pay stamp duty at 50 per cent the normal rate. First-time buyers in WA, meanwhile, pay no stamp duty on properties worth less than $430,000.

These concessions are targeted towards the groups that need the most help buying a property, and are therefore likely to get a bit more traction among cash-strapped state governments than an outright abolition.

Still, nice try, Property Council.

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