Perrottet’s land tax: how does it work and what will it do?

NSW Premier Dominic Perrottet has released what his long-awaited transition away from stamp duty will look like. Will Perrottet’s land tax bolster a more dynamic housing sector in NSW or result in another boon to vendors before the upcoming election? Callum Foote reports.

The NSW government’s stated motivation for making the move away from stamp duty and to land tax for first-home buyers is to reduce the upfront cost of purchasing a house.

All first home buyers purchasing a house worth less than $1.5 million in NSW will have the option of not paying stamp duty and instead move a land tax on the unimproved price of the land paid annually.

The land tax for first home buyers will be calculated at $400 plus 0.3 per cent of land value for properties whose owners live in them. This is separate to the existing land tax levied on investment properties which is charged at $1500 plus 1.1% of land value.

First home buyers only

This new land tax only applies to eligible first home buyers and not other home owners or investors. The two taxes won’t stack, and if the first home buyer who has chosen the land tax sells their house the purchaser will have to go back to paying stamp duty on the property.

Cameron Murray, University of Sydney economist and housing expert, doesn’t think that the new tax will live up to the hype the media has built for it. Perrottet is “obviously sold that the payoff on doing this is quite big, economically and broadly. But, that’s probably where I differ from many people.

“Land tax is a good tax but so is stamp duty so swapping between two pretty good taxes, potentially for less revenue, which is what I understand the NSW transition to be. I’m hesitant if it’s worth the loss of revenue and political capital for what are actually small broader economic gains.”

The argument behind the broader benefits of a land tax over stamp duty is that it reduces the upfront costs of moving house. Also, according to Brendan Coates, economic policy program director at the Grattan Institute, it does little to change people’s incentives to work, save, and invest while raising significant revenue for states.

Land tax in ACT

Only one Australian jurisdiction has implemented a fully fledged land tax. The ACT has gradually implemented a property levy calculated on the unimproved cost of land. The tax has resulted in a steady rise in government revenue from property while minimising “windfall gains to larger home-owners from the swap” due to it being calculated separately for each individual plot, according to Coates.

“If we look to the ACT, we can see that you can use land taxes to raise more revenue, not less, and still keep a moderate stamp duty. If that was how things looked I would personally be much more supportive of the transition,” says Murray.

Since the ACT’s implementation of its current land tax in the late 2000s the proportion of tax revenue coming from property has grown from 24% to 38%.

During this period, the ACT kept a lower stamp duty and ratcheted up the land tax slowly.

Given the small-scale nature of the new NSW land tax “If you’re looking for a coherent overarching story about why this is the way to go, it’s kind of hard to find one” according to Murray. While being “a big fan of more tax and a big fan of more tax from property”, Murray believes that Perrottet’s latest move is “way overhyped, as most things are my profession in general”.

A clever tax, with little impact

According to another expert, the Liberals have managed to help out both first-home buyers and vendors while limiting the impact on renters.

First-home buyers are at an advantage, now that they can choose not to pay stamp duty on the purchase of their house they will have additional funds to put towards being more competitive on auction day.

However, given that the average wealth of second or third home owners is far higher than those of first, it is yet to be seen if these old hands will be willing to bump up their bidding price by a corresponding amount. This is where sellers benefit, in that this move has the potential to lead to an increase in house prices corresponding to the amount of stamp duty that now need not be paid by first-home buyers.

Renters won’t be impacted by the change as all investment properties are exempt from the changes.

The Verdict: Labor tax solution better than Coalition, worse than Donald Trump