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Should the Stamp Duty rules be reformed?

Should the Stamp Duty rules be reformed?

Varun Kumar

Stamp duty (or transfer duty) is a financial burden that may deter individuals and families from entering the property market and acts as a barrier to investment opportunities. It raises the issue of whether stamp duty is still appropriate in the modern economic landscape and calls for replacing stamp duty with a broad-based land tax are getting louder. This issue was considered by NSW Treasury in a recent report NSW Review of Federal Financial Relations -Supporting the road to recovery (the NSW Report).

Stamp duty on land - as it currently stands and the issues buyers face
Depending on the State or Territory you are in, stamp duty applies on the value of the property being acquired with purchasers generally required to pay a maximum rate ranging between 4.5% to 5.75% of the value of the property being purchased. There are concessions available for first home buyers and additional surcharges are payable by foreign purchasers in all States (noting that the ACT and NT do not impose the surcharge).

For example, if a buyer (who is not a first homeowner) wants to purchase a property worth $1 million in Sydney, the buyer will have to pay in excess of $40,000 in stamp duty to fund the acquisition. Generally, banks tend to ask for a 20% deposit and if you fund less than 20%, you are generally required to pay lenders mortgage insurance (LMI). Therefore, a buyer could need around $250,000 in cash to fund the acquisition once you consider the stamp duty, deposit, LMI and other acquisition costs such as legal or conveyancing expenses.

Paying such a high amount of duty on the purchase usually increases the amount borrowed, meaning purchasers will effectively be paying interest on the stamp duty.

Foreign persons (generally those who are not Australian citizens or permanent residents), are required to pay an additional surcharge. In NSW, this is set at 8% or $80,000 on the purchase of the property using our example above. This makes the effective rate over 12%. Therefore, a foreign purchaser will require $320,000 in cash to fund the transaction using our example above.

In addition to affecting the ability of purchasers to fund acquisitions of property, there are other concerns. Stamp duty is a significant contributor to the State and Territory Governments (e.g. representing approximately 32% of the Victorian government’s revenue in 2019). While it is lucrative, the amount governments receive is dependent on the property market. With volatility in the property market, it becomes difficult for governments to manage their budgets.

Furthermore, it could be argued that stamp duty places an unfair burden on those who enter into property transactions, particularly those who enter into such transactions on a more regular basis. As the NSW Report points out, there were 2.8 million properties in NSW in 2019, but less than 200,000 properties were transferred, meaning a significant portion of the NSW Government’s revenue was funded by only one in 20 property owners.

So, if stamp duty is burdensome to purchasers and with its effectiveness being dependent on the vagaries of the property market, it is time to consider an alternative?

The alternative - a broad-based land tax
In 2009, the comprehensive review in the Australian tax system, commonly referred to as the Henry Review suggested replacing stamp duty with a broad-based land tax model. Essentially, rather than paying stamp duty upfront, the amount would be payable as an additional land tax over a longer period. The benefits of this are quite apparent where purchasers would be able to enter the property market without the need to worry about how they will fund the stamp duty amount upfront.

The same suggestions have been made again in 2020 in the NSW Report where the following options have been suggested as alternatives to the current system:

Option Abolish Replace with
1 Stamp duty and existing land tax    A new land tax that has lower tax rates for owner-occupied and higher rates for rental and commercial property. This would reflect higher turnover frequency and previoius land tax obligations.
2 Stamp duty, insurance duty and emergency services levy A new flat rate land tax. The existing narrow and progressive land tax paid by rental and commercial properties, is retained.
3 Stamp duty and existing land tax New land tax levied at a progressive rate scale.
4 Stamp duty and land tax New land tax on capital-improved land values.

However, any changes to stamp duty will need extensive transitional rules. For example, taxpayers should not be expected to pay the additional land tax if they have already paid stamp duty on the acquisition of the property in the past. Additionally, the existing stamp duty concessions (e.g. for first homeowners) would need to be factored into the yearly land tax calculation.
To avoid double taxation and inequitable outcomes for property owners, the NSW Report incorporates a few options for transitional rules:

  1. Stamp duty is abolished, and all properties become liable for the new land tax at their next sale. Existing properties remain exempt from new tax until sale.

  2. At the time of property purchase, buyers have the option of paying stamp duty or the annual land tax. Property owners can also choose to opt-in to land tax. 

  3. Stamp duty is abolished, and all properties become liable for new property tax, but some or all current property owners are granted a credit to be used towards the new land tax liability. 

  4. Stamp duty rates are gradually lowered while new land tax rates are increased over a period of years.

Each option has its pros and cons and the States and Territories would need to consider the significant impact on their revenue given they are accustomed to collecting revenue upfront. By switching over to one of the models above, the revenue collection will be spread over a longer period of time. However, job creation and consumer spending are high up on the Government’s agenda and abolishing stamp duty may be a step in the right direction if it facilitates an increase in transactions and therefore employment in related industries, such as property and construction.

Improving stamp duty - business restructures
There are some exemptions available for business restructures, however, the eligibility criteria are generally strict (depending on the State or Territory). An area of perpetual angst is that stamp duty legislation is not harmonised with income tax legislation. Situations commonly arise where a busines restructure may be exempt for income tax and GST but results in a stamp duty liability.
The differing views of each state make business restructuring problematic for many businesses in Australia and generally, the stamp duty cost is often a deciding factor against any proposed restructuring. If State-based stamp duty legislation was harmonised with Federal income tax legislation, it would create numerous opportunities for businesses looking to expand and/or restructure ownership structures.
In a step towards the right direction, the Queensland Treasurer recently announced an intention to abolish stamp duty on eligible small business restructures. A sensible approach would be to link this to the small business restructure relief contained in the income tax legislation rather than drafting separate eligibility criteria for stamp duty purposes.
Reducing complexity for businesses and encouraging businesses to restructure and improve efficiency is imperative.

Final words
Making changes to stamp duty as discussed above would be a massive undertaking and a serious change in mindset. The different options and transitional rules would need careful consideration.
However, such changes may facilitate an increase in transactions and encourage people to build their first homes or move more regularly, boosting the property and construction industry. While the government has introduced temporary measures to support these industries, e.g. the HomeBuilder program, abolishing stamp duty once and for all may be a more permanent solution to an ongoing problem.
If the Federal Government also looks at reforming GST which we discussed in a previous article, this would take away some of the revenue collection pressures of the States and Territories and hopefully encourage them to consider State tax reform.