A lot of people are asking to get rid of stamp duty. Stamp duty is a tax levied by state or territory governments on homes, land and investment property. However, it is a tax that makes purchasing a property prohibitive. Removing the up-front cost appears exciting but what it is replaced with could be far worse.
The cost of stamp duty is often seen as a burden for first-home buyers. However, that is extremely short-sighted as the cost affects every buyer – except perhaps the uber wealthy. Stamp duty deters existing homeowners from moving as people would rather not waste money on a tax. The tax also restricts property choice as the extra cost can blow the budget.
Stamp duty is calculated as a percentage of the sale price and is payable upfront making the sale price higher. Most people – not just first home buyers – are often struggling to save money for a property. Second home buyers that need a bigger place may not be able to move and waiting could mean they are priced out. Downsizers with limited incomes will not forfeit cash for a tax. The additional tens of thousands for tax limits most purchasers for a raft of reasons.
It seems banks win though, by including the tax in mortgages. Governments should be concerned that banks and not people are benefiting. A very large percentage of people are borrowing to pay this very large upfront cost. The cost of that additional lending has an impact on the economy too as more disposable income goes to banks rather than small businesses. However, some state governments are suggesting land tax. NSW has a limited scheme and Canberra also has moved from the upfront model.
The replacement would be an annual land tax and would be ongoing. Whilst it seems more manageable it offers governments opportunities to increase it more easily. Indeed, the land tax could be worse than the huge stamp duty we currently endure. Canberra introduced a land tax suggesting it would be less burden up front but now the annual taxes have increased consistently and are higher for investors.
In Canberra, the annual rates now cost many homeowners more than $4000 a year and are closer to $10,000 for investment properties paying the extra land tax. Investors are selling up as the tax is unsustainable. Rates now account for about 30 percent of the ACT’s own-source revenue, up from 17 percent in 2012-13.
There is no mention of just allowing people to pay the stamp duty over time – similar to the Higher Education Contribution Scheme (HECS). People could choose a period and pay the installments. This way the stamp duty would still be collected and people could still choose the existing up-front option. This option would not allow State Governments to keep raising land taxes.
It is important to revise stamp duty collection but property owners and investors need to be discerning. Governments need taxes to fulfill promises and tax reform will always have future implications – so be careful what you wish for.