Perrottet puts his stamp on tax reform debate

Two things are striking about the revenue projections in the NSW budget out to 2023-24 and all the accompanying commentary.

Two things are striking about the revenue projections in the NSW budget out to 2023-24 and all the accompanying commentary. Picture John Grainger

State stamp duties on property transactions were not supposed to be abolished as part of the John Howard and Peter Costello GST tax reform package back at the turn of the century.

State governments did not welch on the deal, thereby taking the GST loot and keeping their sticky fingers on the ever-rising stamp duty bonanza — especially for obvious reasons in NSW and Victoria — for these 20 years since.

I just wanted to get that out of the way, as there is a very common misperception that such a trade-off was part of the GST package, ahead of discussing the NSW government’s plan to — finally — ditch these stamp duties, now generally called property transfer duties.

The GST package was mostly about swapping it for the old wholesale sales tax, with a big dollop of personal income tax cuts to make it palatable.

The states did agree to abolish a whole series of minor duties, including the small in dollars duty on the mortgage itself — the cause of the misperception — and they mostly followed through.

Now NSW is finally going to abolish the property transfer duty and replace it with an annual property tax, which will also scoop up any land tax.

Except it’s not going to do any such thing. At least, not yet and possibly never — which made its “inclusion” in the budget documents and in the Treasurer’s speech under the heading “Tax Reform” quite bizarre.

Two things are striking about the revenue projections in the NSW budget out to 2023-24 and all the accompanying commentary.

First, you will look in vain for the words “annual property tax”, far less any figures for how much it is projected to raise even in 2023-24. You’d think a tax “being introduced” in 2020 would be starting to raise some revenue by 2024.

Secondly, the budget projects that revenue from the property transfer duty will not only leap by 50 per cent from 2019-20’s lockdown-reduced $7bn to $10.5bn in 2023-24, but it will actually inch past payroll tax to become the state’s single biggest revenue source behind the GST.

That’s a lot of money to be raised in 2024 from a tax that was “abolished” last Tuesday. More fundamentally, more prosaically — and even more importantly, more arithmetically — that’s an awful lot of state revenue to “swap” for something else.

And that is the problem when you propose to swap a one-off tax for something akin to its equivalence but spread over many years. You lose a lot of upfront revenue for the promise of a permanent annuity stream.

Now NSW Treasurer Dominic Perrottet — or perhaps, more accurately, the advisers in Treasury and other places — think they are being clever in dealing with that issue by proposing the tax be voluntary. A property buyer could choose the one-off transfer duty or the annual and permanent property tax.

The choice is being projected as “different horses for different courses”; it would make sense for some intended long-term buyers to stick with the one-off transfer duty; those likely to be trading properties more often would go for the annual tax.

So on that basis, you wouldn’t get a 100 per cent switch from the old to the new at introduction — which would be the case either if the new tax was made compulsory or it was so attractive to buyers.

The broad arithmetic is this. Instead of paying, say, $60,000 in one-off transfer duty you could opt for, say, $2000 a year (but rising) in the annual tax.

Despite a great deal of detail on how the switch would work for individual buyers there was nary a word on how it would impact the budget.

Take 2024. If every property buyer in that year opted for the new tax, the $10.5bn projected for transfer revenue in that year would evaporate; it would be replaced by a new revenue stream of just $300m-$500m a year. Even at 50-50, NSW would lose $5bn of revenue in the first year. Is any of that really going to happen? Methinks Treasurer Perrottet had a pretty (unthought) thought bubble above his always smiling countenance.

Let’s now see how the “feedback” feeds back to the government and whether this week proves to be the last we ever hear of this proposed “tax reform”.

The reason the GST trade-offs worked was that at the core we were swapping one transactional tax for another — WST for GST.

This proposal would swap a one-off tax for an extended revenue stream.

It’s sold as getting rid of an archaic tax that is an impediment to liquidity in the property market; owners are discouraged from turning over properties because of the embedded investment they have in the payment they’ve made.

The evidence that the existing duty has hindered turnover, especially in Melbourne and Sydney, is non-existent.

It is swamped by the tax-free nature of owner-occupied property and the tax-advantaged status of investment property, along with ever-rising property values.

Someone who bought a property for, say, $300k in 2000 and paid, say, $15k in duty, was quite — OK, relatively — happy to pay, say, $40k duty on the purchase of their next property after selling that first property for, say, $400k of tax-free gain.

And will quite willingly pay $80k in duty on their next property after pocketing another $500k tax-free gain on the second property.

Near-zero mortgage rates and tax-free capital gains combining to underwrite asset inflation make this much more complex than the simplistic “reform” proffered by a smiling Treasurer.

An annual property tax smells to me a lot like — an awful lot like — the tax on the imputed rent of an owner-occupied house that is so beloved of and lusted after by mixed assorted economists and wealth distributionists. That said, I’m more than happy to have the existing transfer tax work quite effectively as a gentle wealth tax, or a public surcharge on the private gain from trading access to location or view.