Stamp Duty. Two Words That Are Right Up There With Parking Inspector
While it’s never been a popular tax, it’s recently gained a bit more airtime since COVID hit. State Governments are looking at a more broad-based tax system, as the Federal Government looks at a range of emergency plans and reforms to get the economy back on track.
One of the suggestions up for discussion is the prospect of canning stamp duty altogether, in favour of broader taxes that will drive income year after year, regardless of the state of the property market.
Stamp duty hasn’t been a popular tax for a long time. It’s seen as an inefficient tax lobbed only at property buyers, which really can add significant cost of a property, creating barriers to buying properties closer to work or bigger dream homes.
According to Domain figures, stamp duty paid on a median-priced home went up between 2004 and 2019 by 102 per cent in NSW to a high of $42,269, 183 per cent in Melbourne to $44,164, and 189 per cent in Brisbane to $11,013.
So why are we hearing about it now?
The Reserve Bank Governor thinks the best way for a nation to recover from a crisis (like no other) is for governments to underwrite the business-led recovery. This may mean embracing the Henry Tax Review, which involves adopting so called “overdue” tax reforms across 3 pillars – generation, consumption and land. This may result in slashing business taxes and increasing GST, while ditching stamp duty in favour of land tax.
While this may seem pretty exciting for homebuyers, you could potentially end up paying in other ways. It does have the potential to distort markets and increase financial burdens on Australians, eventually leading to an increase in property prices.
The key reason behind this reform is to increase the overall tax base. Broadening this tax takes away exposure to the property market. During booming years, Governments rake in the dollars, but when things slow down, their income is compromised – stamp duty is the main source of revenue for all state and territory governments.
So no, this isn’t a special bonus for good behaviour. Governments are craftily keeping their budgets afloat. If people aren’t buying property as much, they aren’t adding to the government piggy bank. That means broader taxes will bite into every Australians budget, buying a home or not.
One thing you may not have considered is taking away the tax will further remove the barrier to entry (which is a good thing), but it will also increase the demand for property, which will further put up the prices and create an artificial bubble as demand rises. All of sudden nothing has been gained (financially speaking) if you’re trying to buy a new property.
So how likely is this to happen? The Federal Treasurer has confirmed that tax reform is being considered in his ministerial statement, but that will be alongside a whole host of other economic reform measures.
But it could be a brave move right now.
In May, the Reserve Bank released a statement saying the first half of the year will see the GDP fall sharply, expecting the economy to shrink by 10 per cent, as hours worked dropped and unemployment rises. The danger with the abolition of stamp duty is it could prove to be a deflationary move.
Saying this, it’s been long reported that removing stamp duty has been unanimously supported by economists, academics, the Productivity Commission, Infrastructure Australia and government tax reviews.
“There’s a consensus among economists and policy-makers that stamp duty is the worst thing in Australia,” says Ken Morrison, chief executive of The Property Council of Australia.
“It distorts behaviour, cripples job creation, lowers growth, and locks people into housing that might not be appropriate for their needs.
“Really, by anyone’s standards, it’s a terrible tax. There’s a lot of debate at the moment about corporate tax, but stamp duty is two times worse for the economy than company taxes and sets a new economic benchmark for worst taxes.”
Long-term reform will create benefits for the economy and GDP, but it may take some time for those benefits to kick in, so it may not be a great time to do it now. But that does not mean that it should be taken off the table.
We’ll wait and watch for the economy boffins and politicians to make their calls. In the meantime, first home buyers should relish in not having to dish out a cent to governments as they’re exempt from paying stamp duty. Keep saving your bickies and get ready to make your move!