PURSUING CHANGE IN TIMES OF DISRUPTION
When 2020 started, we all might have been forgiven for thinking we had some idea of what to expect, barring the occasional geopolitical or economic hiccup. Instead, the whole year became a ‘black swan’ event for which most businesses and households were generally unprepared.
Conversely, at the outset of 2021, we can now freely admit uncertainty about what the new year will bring, but we might also allow ourselves a little comfort in the idea that we are more practiced at dealing with the unexpected. Maybe, just maybe, some of us have even got a taste for it.
Reform from Chaos: Changes to NSW Transfer Duty
Of course, change in the law is nothing new, but even by legal standards, 2020 saw some whopping announcements. One of the bigger ones is still somewhat unheralded, which is surprising considering the decades-long implications it raises.
Sensing a mandate for structural reform, in November the New South Wales Government announced its intention to overhaul transfer duty (commonly referred to as stamp duty) entirely.
Under the proposal, purchasers of property would be given the chance to opt in to a new land tax-style regime, under which they would pay annual levies on their land instead of a large upfront duty charge. The tax payable would be calculated in reference to the value of the property, with rates differing for owner/occupiers, investors and commercial tenants. A purchaser could opt out and choose to pay stamp duty instead, but once a purchaser selects the land tax option for a given property, all future owners of that property would be locked into the levy.
NSW’s policy decision follows the ACT’s lead in 2012-2013, when that territory began a twenty-year transition from stamp duty to a land levy on all property. In contrast, NSW is looking at a process under which a conversion is made at the time of individual property purchases (and at the purchaser’s election) rather than a state-wide migration.
Because the annual land levy would be significantly less than transfer duty, the policy change would represent an immediate reduction in state revenue. In essence, NSW is gambling that current low costs of borrowing will make it easier to implement this reform now rather than later.
Why Nobody Likes Stamp Duty
Since at least the Henry Tax Review in 2010, it has been an article of faith that stamp duty is an inefficient way of raising revenue. But since it accounts for roughly one quarter of their revenue, state governments have been loathe to get rid of it. This is despite its many drawbacks.
From the states’ perspective, duty is unpredictable and tends to create budget shortfalls during economic downturns. For purchasers, transfer duty roughly triples the costs of changing homes, thereby distorting the market and preventing a number of housing transactions that should otherwise go ahead (e.g. people looking to downsize or move closer to work or schools). It increases entry costs for first home buyers. It also shifts the burden of funding public expenditure onto property buyers to the benefit of those who stay put (one quarter of all properties in NSW have been held for more than twenty years, meaning those owners may not have contributed to government duty revenue for decades).
Perhaps most tellingly of all, stamp duty is horrendously inefficient in its collection and the costs it inflicts. The Henry Review calculated that every dollar of revenue collected costs the community $0.70 in costs and foregone benefits. This compares poorly to every other form of taxation in Australia, and in particular land tax, which was found to have significantly lower costs and a net-positive effect on the community.
Where One Goes, Will Others Follow?
Besides the ACT, NSW is the first state to undertake such a significant overhaul of its revenue model. Part of its justification is that borrowing costs are low at present. This will be needed to cover revenue shortfalls, which will endure for a very long time.
Doubtless, there will also be unexpected outcomes. For instance, will investors gravitate towards NSW in light of reduced transaction costs? Also, will some of the convoluted structures used in property investments, made necessary by NSW’s spotty duty exemptions, be simplified in the future?
However, it might also just be that in the aftermath of Covid-19, changes once thought difficult no longer seem so daunting. We might therefore see other states follow NSW’s lead. After all, think of the changes that you’ve made in the past twelve months, and how many of those changes are for the better. Absent a global pandemic, would you have implemented those changes as quickly as you did? Or even undertaken them at all?