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Replacing the current stamp duty or conveyance duty on the transfer of property and the narrow base land tax with an annual property tax would be a fairer tax and it would increase the productive use of available property. The reform would provide Australian state (and territory) governments with a more stable and predictable source of revenue.

To reduce tax redistribution effects of the reform relative to the current taxes, and to enhance political acceptance, alternative ‘details in the design’ of the reform proposal are described and evaluated. These include the tax base, the tax rate and transition options for the replacement property tax.

Why Reform?

Stamp duty on the transfer of housing and commercial property is paid only when property is sold and bought. The duty can be avoided by continued ownership.

The stamp duty provides an additional cost and barrier to property owners shifting their choice of property when circumstances change, including location of employment, family demographics, incomes and business opportunities. Additional reallocation of the ownership of residential and commercial property from lower value to higher value uses and users would be a key efficiency gain in replacing the current stamp duty with an annual property tax which is independent of property transfers.

The transfer tax is extremely unfair. Those who change property ownership more frequently than the average pay more tax over their life cycle than those who hold onto the same property for longer than the average. Yet, both benefit from state provided education, health and so forth funded by the taxes. For those who hold properties for around the average of between 15 and 20 years, the reform proposal means no change in tax paid over the life cycle, and a more productive economy.

Property asset prices are unlikely to change with an aggregate revenue neutral reform package (see appendix of my working paper for details).

Tax Base and Tax Rate Options

As is often the case with tax reform, trade-offs will be required across efficiency, equity and simplicity; assuming an aggregate revenue neutral reform.

National productivity gains and simplicity point to a land tax base and a flat rate for the replacement annual tax for all types of property. On the other hand, such a reform will have redistribution effects given the replaced stamp duty has an improved property tax base and a progressive rate schedule, and the current land tax on commercial and rental property has a progressive rate.

Redistribution effects of the reform package relative to the current taxes can be reduced by using improved property as the base rather than land, and/or a progressive tax rate schedule rather than a flat rate. Equity should be considered in the wider context of all taxes, including the progressive income tax. Relative to a land base and flat rate, either an improved property base or a progressive rate schedule induce some distortions to decisions, but lesser distortions with much smaller costs than the current taxes to be replaced.

Arguably, a revenue neutral reform package with similar equity effects would involve a lower rate for owner occupied property for which only stamp duty is replaced and a higher rate for rental property and commercial property for which both stamp duty and the current land tax would be replaced. Also, the turnover rate is higher for rental and commercial property. Rates for the annual property tax could vary between the states and territories for reasons of revenue and equity.

Some Transition Options

A one-off switch from the current taxes to the replacement annual property tax can be seen by many as a form of double taxation for recent buyers who have just paid stamp duty and then face the replacement tax. Several transition options to reduce the double taxation are available.

One option is a revenue neutral gradual phase down of the stamp duty rate to be replaced and phase up of the new annual property tax, with the Australian Capital Territory (ACT) example of a 20-year adjustment period. Another option is to provide credit for recent payment of stamp duty as a credit against the annual property tax, for example 50 per cent for last year, 40 per cent for two years back, and zero after five years. The former has the advantage of revenue neutral, but it takes many years to reap the efficiency gains. By contrast, the credit option reaps efficiency gains, but comes at a short-term revenue cost that could be offset by a slightly higher annual property tax rate.

Provision should be offered for those with liquidity problems to carry-forward the replacement annual tax as now is available for local government rates. These people include the ‘asset rich and income poor’ and those with unexpected health problems and unemployment. Funds carried forward would be indexed to the government borrowing rate for revenue neutral and equity.

Concluding Observation

A number of alternative details or design options in an annual property tax replacement for the current unfair and distorting stamp duty and narrow base land tax are available. The political and social choice among the options requires evaluation of the trade-offs of efficiency gains and simplicity versus the redistribution effects of the replacement option relative to the taxes to be replaced.


This blog post is based on John Freebairn’s recent working paper, ‘Reforming state taxes on property’ (TTPI Working Paper 6/2020).

This article has 3 comments

  1. Hi John, What are your thoughts on Dr Cameron Murray’s criticisms of replacing Duties with a Land Tax?

  2. In an article in The Conversation Cameron Murray raises doubts about the benefits and rationale in replacing stamp duty on the transfer of property with an annual broad base land or property tax in an approximate revenue neutral reform package as proposed in my TTPI blog and more detailed working paper. He questions:
    • the efficiency gains of the reform;
    • the effects on property prices; and
    • removal of an automatic stabiliser.
    As a turnover tax, stamp duty is paid when property is bought and sold, but it is avoided if one maintains ownership. By contrast, a replacement annual land or property tax which collects on average and over time about the same revenue does not add to the transaction costs to buy and sell when circumstances change, including job opportunities, family demographic, income and preferences, and business conditions and opportunities. The conventional efficiency argument for reform is to remove these decision distortions. Murray questions whether the reform package would change buy and sell decisions and claims CGE models have imposed arbitrary parameters. Econometric estimates for Australian property sales across time and the states by Davidoff and Leigh (Economic Record, 2013, pages 396-410), and references to overseas studies, find significant negative effects of stamp duty on the turnover of property. The CGE model estimates criticised by Murray do not include external costs of congestion, pollution and more accidents associated with additional transport. Yes, there are different estimates of the key parameters determining the magnitudes of the distortion costs of stamp duty, but most point to large efficiency losses.
    A possible offsetting market failure noted by Murray is that the market chooses too many property transfers as speculative decisions by owners of rental property, and with adverse effects for renters. This argument does not apply to owner occupied property or to commercial property.
    Taking a longer term and average market perspective, I argued that a revenue neutral reform package would have a negligible effect on property prices. Given that tax reform is a quasi-constitutional policy and with infrequent large structural changes, the long run is an appropriate time. The market for property tends to average across buyers and over time, rather than a focus on individual properties or buyers and sellers with different expected and actual rates of property turnover. Then, an approximate revenue neutral replacement of the infrequent stamp duty with a regular annual land or property tax generating a similar average tax burden across time should have little effect on average property prices.
    Murray argues for retention of stamp duty because of its automatic stabiliser property, in contrast to the argument that a replacement annual property tax offers a more stable and predictable source of state (and territory) government revenue. Volatility of stamp duty is not always highly correlated with the business cycle in the way as income tax and payroll tax revenues. Further, decisions based on the split of GST revenue between the states are based on several years of lagged data adds to future revenue uncertainty and muddies first-round automatic stabiliser effects. Concern with the extreme volatility of stamp duty revenue is an arguable debate that state governments often increase expenditures with limited evaluation of benefits from a windfall boom, and then they find it difficult to wind back these increased outlays when the windfall disappears.
    An important supporting argument for replacing stamp duty with an annual property tax in addition to the efficiency arguments is one of equity. Compared with households (and businesses) who hold property about the average length of time, those who hold property for longer than average pay less stamp duty and those who buy and sell more frequently pay more stamp duty over the life cycle. Yet, each category is provided with similar levels of government funded education, health and other services. A replacement annual property tax means similar contributions to government tax revenue regardless of how frequent and often they transfer property ownership in response to changes in circumstances, and greater horizontal equity.

  3. Thanks John for an excellent well researched reply.

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