In February 2013, I published an article titled ‘Increases in residential land values in Australian capital cities’, in Urban Link, an electronic journal produced by the Institute of Urban Studies at Pennsylvania University. The article examined the reasons for the increases in residential land values (specifically focusing on the land itself, rather than the houses built on it) since my arrival in Australia in 1957 and provided insights into future suggestions. Towards the end of the article, I included a brief comment on the unsatisfactory nature of the tax imposed on most land transactions.
My writing on this topic was partially inspired by the 2010 Henry Tax Review, which made several recommendations, most of which were ignored by the then and subsequent federal and state governments. One of these recommendations was the implementation of a lower-rate land tax on all land, coupled with the abolition or significant reduction of transfer duty.
Since then, however, changes have started to take place in New South Wales, Victoria and the Australian Capital Territory, which bodes well for the future. As other state and territory governments watch these developments, they may contemplate following suit without jeopardising their popularity.
The proposal in the Henry Review to eliminate the exemption from annual land tax on the principal or sole residence has significant merits, particularly if the current tax rate is reduced. This change would also remove or reduce the need to consider imposing a capital gains tax on the family home, which would require homeowners to maintain records of every deductible expense incurred during their residency. Valuing the land on which a home is built would be a straightforward task since land valuation is a routine practice carried out by professional valuers.
By implementing such a change, it could potentially facilitate the reduction of state governments’ excessive reliance on occasionally unpredictable stamp duty levied on property and vehicle transfers. This would benefit individuals who frequently move residences or need to replace their vehicles, as well as empty nesters seeking to downsize their living arrangements.
Turning stamp duty into a land tax
The situation of less prosperous people could be acknowledged and alleviated by initiating the tax at a level slightly below the median value of a residential land block in a capital city (adjusted annually). For example, with a land tax of 0.1% starting at a land value of $300,000, land valued at $400,000 would incur an annual tax of $10, while the owner of land valued at $1,300,000 would be liable to pay $1,000.
A significant challenge would lie in managing the transition from one tax system to another. The only suggestion I can offer is that homeowners who have already paid land tax at the time of purchase should receive a credit for this amount (which may not be substantial if they have resided in the same location for many years) and start paying the new tax once this credit is depleted. And if the credit has not been fully used upon property transfer, the remaining amount can be transferred to the new owner.
This expanded land tax, which would generally be manageable for most taxpayers, would generate significant government revenue due to the large number of individual payments received. It would also gradually increase over time without drawing much attention as people, regardless of age, moved out of their homes. It could even be incrementally adjusted upwards without causing substantial hardship. Another benefit would be the minimal year-to-year fluctuations, facilitating smoother long-term planning for governments.
This suggestion builds upon the general proposal made in the Henry report. However, it should not be misconstrued as advocating for the elimination of charges for real estate or motor vehicle transfers, because the government departments responsible for maintaining records of such transactions incur significant operational costs.
I have two suggestions regarding land transfers. A standard charge of $500 could be implemented for straightforward transfers that do not require extensive investigations. Alternatively, a progressive charge could be introduced, starting with a base amount and adding increments for each year or partial year that the land has been held by the same owner. For instance, an initial fee of $300 could be applied for the first year, with an additional $50 for each subsequent year. Regarding motor vehicle licence transfers, a fee of $100 could be established, or $100 plus $10 for each year or partial year of ownership. These fees would be adjusted periodically to account for inflation.
A simple way of doing a clean sweep would be to have a restored uniform Federal land value rate with a non-refundable credit against income tax for homeowners so that those who pay rent to the Crown are relieved pro tanto of tax via PAYG. You would still raise a lot of money from disguised dummied foreign ownership as well as others to cut income tax rates and GST across the board. As for State taxes they can add their rates to the Federal to be collected jointly to get rid of State taxes.
The Roman Empire suffered from demographic and fiscal implosion similar to what we are now looking at as the burden of financing the State is shifted from landholders to labour and industry. Birth rates fall and barbarians are imported to make up labour supply. But the migrating barbarians decide they don’t like paying Imperial taxes either and so much the worse for the Imperial government and its tax collectors.