Urbanised Pty Ltd (www.urbanised.net) welcomes the opportunity to provide input into the consultation process for the reform of stamp duty in New South Wales. Urbanised Pty Ltd is a firm that provides economic advisory services to leading firms in the property, infrastructure, financial services and agriculture industries. Tax policy is an area of expertise. 

Urbanised Pty Ltd supports the reforms outlined in the Consultation Paper on economic efficiency grounds. However, the practicality of the proposed reforms needs to be very carefully considered. In all examples of tax reform, the key “success ingredient” is whether most of the population are no worse off as a result of the change. The Consultation Paper doesn’t adequately prosecute a case for why most people would support the reform proposal, but to be fair, the process may not yet be at that stage. 

The Consultation Paper asks a question linking stamp duty reforms to saving for a deposit. We cannot see the relevance of some of the questions relating to whether the present system is an obstacle to a home purchase and linking that with saving for a deposit. The homebuyer purchases a property and as part of the loan they build in stamp duty. Moving to an annuity will have marginal impact on any of these decisions. Homebuyers will still have to save for a deposit which may be marginally impacted by not having to borrow for stamp duty. But there are swings and round abouts and lending institutions will consider the annual charges as part of a lenders ability to pay - so the impact is neutral at best. 

To determine the effects of the reforms we use a simple measure to illustrate the policy challenges. Homebuyers (and renters) are the largest group are impacted by the changes, so the chances of reform success will hinge on the impacts on that group. 

Calculations indicate that homebuyers are better of paying stamp duty upfront as opposed to opting into the reforms. Rather than construct complex cashflow models – Urbanised compares the embedded interest only costs of stamp duty charges (on a $1.1 million purchase) within a mortgage to the proposed property tax charges. The interest only costs are $1,152 per annum (subject to interest rate changes). Whereas the proposed tax reforms are likely to be around $1,600 per annum (subject to annual UCV growth) as outlined in the Consultation Paper. There is a substantial difference between current charges and the proposed taxes (under this comparison). For the reforms to be successful, the charges must at least match the costs to the homebuyer of adding upfront stamp duty to a mortgage. 

The proposed investor rates are more than triple the amount of the owner occupier rates. Given that 36% of residents live in rental accommodation, there will likely be implications for rents. It maybe that investors will pass a significant share of the increase onto renters. At present, there is no difference in stamp duty paid between owner occupiers and renters. This symmetry should be maintained to mitigate some of the increase in rents that will result from the changes as they are proposed. 

We calculate that the embedded interest only charges for an investor of a $1.1 million house is $2,412 (without tax considered) per annum under the existing system. However, for the proposed changes the higher rate and thresholds represents some $7,821 per annum on average over a 10-year period (net of income tax).  That represents at least a $5,409 average annual difference (depending on taxation circumstances), that if passed on could add more than $100 per week to an individual's rent. 

The existing stamp duty system creates incentives for Government to deliver more land supply. In times of limited supply, there is limited development and this impacts on stamp duty revenue. However, under the proposed changes, if the Government constrains land supply that will drive up land prices and increase tax revenues. The new system has the potential to create perverse market outcomes. A way to realign the incentives maybe to fix the unimproved capital value of the land at acquisition. While this will not totally fix the observed paradox, it will limit the flow effects of limited land supply delivery on the entire housing market. Alternatively, the Government could use the existing cost base (the purchase price of a house with land) and apply an annuity style tax rate. This would also capture improvements which are outside the tax base in the reforms. 

It is understood that the measures proposed have been designed to be revenue neutral. It is critical that the Government maintains this constraint.  Carve outs, differential rates and discounts add to complexity of the system and risk government revenue. The Government should keep the system as simple as possible, avoiding discounts and differential rates to ensure that it protects its revenues. For instance, using the system to benefit one type of development over another or even differentiating between ownership could create revenue risks and market distortions. 

Finally, it is understood that the reforms have been designed as an opt in system, but to measure the welfare effects of reform universal application is assumed. Perhaps a way around the issues mentioned is to allow homebuyers to have a permanent opt in choice, but that will not provide the economic benefits that the reforms promise. 

This short submission has been prepared based on support for the reforms. But for the reforms to be supported in a policy sense the following recommendations are suggested: 

Recommendation 1. 

Recalibrate the rate to be applied to the unimproved capital value of land to ensure that homebuyers are no worse off (hopefully better off) under the reforms. 

Recommendation 2.  

Ensure that Government revenue is protected by removing differential rates and discounts. 

Recommendation 3.  

Protect renters through measures to limit the costs of tax outgoings as a result of the reforms (or acceptance of the property tax). Investors should not be charged tax rates above the owner occupier rate to limit the flow on effect. 

Recommendation 4.  

Revisit the definition of the tax base and consider applying a fixed rate to the price of a house and land. 

Recommendation 5.  

Fix the unimproved capital value of the land at acquisition to partially address Government incentives to not deliver land supply.  

There will no doubt be issues relating to commercial property and property developers. We chose not to cover those as the practicality of achieving these important reforms will be a function of their impact on voters not necessarily businesses. 

Urbanised Pty Ltd wishes the Government all the best in reviewing and prosecuting the reforms as they are critical to improving the allocative and productive efficiency of the NSW economy.  

Yours sincerely 

URBANISED PTY LTD 

Stephen Albin 
Managing Director 

Urbanised Pty Ltd has not been paid by third parties to produce this submission. The views expressed in this submission are the personal views of the Managing Director and do not represent the views of clients or any groups that Urbanised may be associated with.