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Posted: 2024-03-19 18:00:00

While state governments provide stamp duty exemptions to many first-time buyers, the nature of the tax still affects what properties are available to would-be owners and renters.

Stamp duty discourages owners from moving to housing that better suits their needs, whether that’s a worker who is offered a better job in another city or an older person living alone in a big house. It’s one reason there are so many large family homes with multiple spare bedrooms in the best-located suburbs of our capital cities.

First home buyers are often exempted from stamp duty.

First home buyers are often exempted from stamp duty.

Stamp duty is a de facto tax on divorce because, when a family home is sold to allow assets to be split, the separating couple each need to pay stamp duty if they purchase again. It is also blamed for encouraging families to renovate when moving house might have been a better option.

These many distortions mean land is not being allocated to its most valuable use and that affects everyone, including renters.

A 2021 study by the NSW Productivity Commission concluded stamp duty has “material consequences for affordability by reducing the effective supply of housing and placing upward pressure on prices”.

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The alternative to stamp duty is a broad-based annual property tax, similar to council rates, which would do little to change people’s incentives to work, save, and invest.

Brendan Coates, who has spent years researching housing taxation, estimates that making the switch from stamp duty to a broad-based property tax would reduce rents and house prices by up to 6 per cent.

And it wouldn’t just lower the cost of housing. A Grattan Institute submission to the Victorian government last year estimated that swapping stamp duty for a property tax would “make Victoria up to $5 billion a year better off, while also improving housing affordability”.

Stamp duty is also a notoriously volatile source of state revenue because it fluctuates with the ups and downs of the property market. Replacing it with a well-designed property tax would put the funding of crucial public services like schools, hospitals and emergency services on a much firmer footing.

Even so, the ACT is the only jurisdiction to have done away with stamp duty. In 2012, it launched a 20-year plan to gradually replace it with a broad-based property tax.

Dominic Perrottet proposed changes to stamp duty laws while he was treasurer.

Dominic Perrottet proposed changes to stamp duty laws while he was treasurer.Credit: Dean Sewell

In late 2020 Dominic Perrottet, then NSW treasurer, announced plans to phase out stamp duty in favour of an annual property tax.

But the scheme fell flat, and in the end only NSW first-time buyers purchasing a home worth up to $1.5 million were given the option of paying the annual levy rather than stamp duty. The Minns Labor government scrapped the policy soon after winning office last year.

The Victorian government has considered giving home buyers the option of paying an annual property tax instead of upfront stamp duty but no policy has ever been announced.

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Analysis undertaken during the development of Perrottet’s ill-fated reform underscored the potential benefits.

Modelling by NSW Treasury found the swap from stamp duty to a property tax would have lifted homeownership in NSW by 6.6 per cent. That equated to about 130,000 households “shifting from rental accommodation into their own homes”.

Perrottet’s unsuccessful attempt to abolish stamp duty also showed that federal government leadership and financial support is required to get rid of Australia’s worst tax. States will need temporary assistance from the Commonwealth to efficiently phase out stamp duty.

But the payoff would be substantial. Coates estimates a nationwide shift from stamp duties to a broad-based property tax would lift Australians’ incomes by $20 billion a year.

Federal Treasurer Jim Chalmers often speaks of the need to lift productivity; leading a push to phase out stamp duty would achieve that while reducing rents and housing prices.

It could be a rare win-win-win.

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