Property owners in Australia pay more tax than most in the OECD

Land tax, broadened to include a far wider range of owners, and without the plethora of current exemptions, looms as a possible outcome of national tax reform.

The Australian government’s Tax Discussion Paper, released Monday, found that taxes on property – stamp duty and land tax – contribute 9 per cent net of the total tax base which is far more than the OECD average of aound 5 per cent.

At the same time property owners benefit because the family home, whilst subject to stamp duty and council rates, is exempt from capital gains tax or a tax on imputed rent. And they further benefit from investment property – described by the paper as the Australia’s third most popular savings – through the intereaction of negative gearing and capital gains tax.

The paper showed a clear preference for removing stamp duty, which creates, for the tax boffins, a “high marginal excess burden”. By comparison, land tax, has a “negative marginal excess burden.”

Treasury argued that broad-based land taxes, such as municipal rates, have a low economic cost because they are immobile and cannot be moved or varied to avoid tax.

“Land taxes paid by foreign and domestic landowners are only redistributed to domesic householdes providing a benefit to Australian households,” the paper claimed.

But such a land tax would be different to the complexities of the current state by state system. The tax paper noted that more than half of the land tax base was exempted from the current regimes which resulted in “lost revenue and distorted investment.”

It also noted the OECD argument that the heavy burden of land tax on on large owners discouraged institutional investment in Australian private rental housing. 

On Monday, the property sector welcomed the focus on stamp duty.

“We recognise that abolishing stamp duties would mean replacement revenues would need to be provided to fund necessary state government services and we are keen to participate in this debate,” said Property Council chief executive Ken Morrison.

“The most obvious solution would be to broaden and increase the GST, but we are open to discussion on a broad base low rate land tax or other revenue options,” he said.

Housing Industry Association managing director Shane Goodwin said successful taxation reform was vital to ensuring future economic growth and productivity growth. 

“Housing will form an integral part of any successful future taxation reform with independent research demonstrating that new housing is one of the most heavily taxed sectors of the Australian economy,” he said.

Urban Development Insitute of Australia president, Cameron Shephard, also welcomed a “full and proper” debate including on “sacred issues sucha as stamp duty.”

The most sacred issue, the taxation of the family home through capital gains tax or the taxation of imputed rent, does appear to be untouchable.

“Given the central importance of the home for Australian families, there is strong consensus that it would not be appropriate to tax either the imputed rent on owner-occupied housing or the capital gains derived from it,” wrote the tax paper. 

But negative gearing is on the table. The paper notes that deductions are being claimed for property investments exceed the rent itself.

The paper argued that the tax treatment in driving investment in real estate and the impact that this has on housing supply and affordability is a “contentious issue.”

“Negative gearing, does not, in itself, caus a tax distortion, but it does allow more people to to enter the market than those who might have had the equity alone to do so.

“Purchasers can make bigger investmeings in property but borrowing…This behaviour is encouraged by the Capital Gains Tax discount as larger investments can result in greater capital gains”

SOURCE: AUSTRALIAN FINANCIAL REVIEW
PUBLISHED: TUESDAY, 31 MARCH 2015
BY: ROBERT HARLEY
@Jurds Real Estate – Cessnock and Hunter Valley Wine Country Property Experts – the place to buy, sell and lease property in Cessnock and the Hunter Region.

The Australian Financial Review
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Property owners in Australia pay more tax than most in the OECD
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