Stamp duty in Australia has been long the focus of passionate debate and also plenty of criticism.
On the back of COVID-19 and the slowdown in property transactions, some of those critics believe the time might be right to look at other alternatives to this type of tax.
However, before making any changes to the current system, it’s also important to look at the socio-economic impacts of any changes and what the alternatives might have to offer.
How are stamp duties imposed?
It’s thought that stamp duty originated in Venice in 1604 and has progressively been implemented throughout the World.
In Australia, stamp duties are levied by individual states and are imposed on the purchase of residential properties, investment properties, vacant lands, commercial properties as well as businesses that include the purchase of lands. The rates of stamp duty vary from state-to-state based on the purchase price and start at around 1.25% before getting as high as 5.75% for properties over $1 million in a state like Queensland.
Current critics of stamp duty
Stamp duty represents around a quarter of revenue in both New South Wales and Victoria and as such, State Government’s are not keen to get rid of it without a fight.
However, it has always been debated whether stamp duty is an effective tax from a socio-political and longer-term social sustainability perspective.
The critics believe that stamp duty changes people’s behaviours as it creates a barrier when purchasing property. The behavioural changes include disincentivising older families, as an example, to downsize to unlock their wealth for retirement purposes. Similarly, it presents as a disincentive for people needing to change properties to move closer to say work or family.
Stamp duty also creates barriers for first home buyers and entry-level investors in expanding their investments and wealth creations. It also can cause a non-constructive ripple effect, where higher costs from the purchaser will in some shape or form can be transferred to the renters or businesses, which may simply not move due to associated stamp duty costs.
There is also an argument that the costs of collection of stamp duty, is also tangible and estimated to be as high as 70 cents on every dollar on various treasury modelling. The revenue collection can be very unpredictable and rely on the property cycles, which in turn can create uncertainties in state budgetary planning.
From a property purchaser’s perspective, the costs seem to be ever-increasing and as such create artificial anomalies in the market with price value as well as supply and demand.
For example, based on Domain figures, stamp duty in NSW for a median-price home increase between 2004 and 2019 by 102% in NSW (costing an additional $42,269), 183% in Melbourne (costing an additional 44,164) and 189% in Brisbane (costing an additional $11,013).
It’s also argued that stamp duty is an unfair tax, as they are not imposed on an individual's ability to pay, rather on an individual’s propensity to move houses more often and irrespective of their essentiality due to various personal, work or family reasons.
All states and territories together with industry professionals have identified all these weaknesses and there is significant debate around the potential resolutions, with some already taking action.
For example, South Australia is progressively abolishing stamp duty on commercial properties while the ACT has been slowly winding down stamp duty to replace it with an annual land tax in a 20-year program.
Some of the alternatives in recommendation include replacing stamp duty with broader-based land tax on a gradual basis so that the buyers are not affected, or even replacing it with a higher GST rate.
What are the impacts of stamp duty reform?
For the most part, there will be a number of positive impacts with the removal of stamp duty.
Buyers will significantly reduce upfront purchase costs, which will have a positive impact on housing prices and housing affordability.
The positive impact will also be felt with employment through increases of employment mobility, arguably reducing unemployment, skill shortages and as such, providing an economic boost to households and businesses.
On the flip side, there is also the belief that state Government revenue could be more predictable through a proposed alternate broad-based tax such as land tax.
So, Where To Now?
While there might be better alternatives to stamp duty, the timing of any changes should be considered carefully.
With the COVID-19 negatively impacting the economy and employment the removal or changing of stamp duty might need to be undertaken in a gradual manner.
This will ensure that the impacts on the economy are mitigated while continuing to create incentives for buyers, while encouraging business transactions and investment in commercial properties.