Why COVID strengthens the case for stamp duty elimination

Of course, economists have argued for decades for stamp duty to be abolished and replaced with a broad-based property tax.

Why? Because property taxes are impossible to dodge – you can’t hide the land – while stamp duties are more easily avoided by simply not changing homes.

Workers can benefit from being close to their workplace. Credit:Rob homer

And why is this important? Because economies thrive when people and resources are free to move to where they can be used most productively.

Workers benefit when they can live closer to their workplace. Retirees benefit when they can downsize and unlock some of the equity in their family home to fund their retirement. Young families benefit when they can move to larger homes that meet their needs.

So how would a property tax work?

It’s literally the multibillion-dollar question – roughly equivalent to the massive hole that would be blown into the state government’s coffers if it chose to forgo stamp duty revenues.

To fully replace this lost revenue, a property tax would need to be applied at around 0.44% in Sydney and 0.50% in Melbourne, according to the report’s modeling.

This tax would only apply to the “unimproved land value” of the house, which is typically about two-thirds of a house’s total value. So for a $ 1,000,000 property, and assuming the land value was around $ 666,000, that works out to an annual property tax of around $ 3,000 per year.

Would you pay it?

The movement is not without precedent. In 2012, the ACT government began a 20-year transition to phase out stamp duty and gradually increase property tax. Last year in New South Wales, Treasurer Dominic Perrottet signaled his determination to abandon the inefficient tax for good in favor of a property tax.

Consultations continue, but the NSW government has indicated it prefers homebuyers to be able to choose whether they want to pay the current new property tax or choose to continue paying the old duty rates stamp instead.

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How would a rational NSW buyer decide? Mostly, it would depend on how long they intended to stay at home. According to the NHIFIC report, the average period of house ownership in both NSW and Victoria is around 12.5 years. That is, on average people move every 12 and a half years or so. Of course, some people stay there much longer and might end up paying more in permanent property tax than they would in initial stamp duty.

According to the modeling of the report, a Sydney resident who bought a million dollar house and stayed there for more than 13.8 years would end up paying more outstanding property tax than if they had opted for a right initial stamp.

In Melbourne, the buyer of a million dollar home would end up paying more property tax after 16.5 years – given the relatively higher cost of the stamp duty.

But given that the average length of housing tenure – at 12 and a half years – is shorter in these two scenarios, the report’s authors conclude that most buyers at this price point would opt for property tax.

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Of course, a much simpler option would be to simply order that all new property sales must fall under the new property tax regime.

Either way, dropping the high initial stamp duty would encourage more people to move, the report concludes. According to NHFIC CEO Nathan Dal Bon: “Households that are considering downsizing and increasing the workforce, or simply looking for more space when working from home during COVID-19 would not be penalized. “

However long it takes us to get there, a world free of stamp duty would be a world in which more Australians have greater freedom to settle in housing better suited to their needs.

Let’s just hope that home hair salons and home school facilities are not required features for too long.

Jessica Irvine is an economics editor.

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