In starting with a brief refresher, stamp duty is the land transfer tax. It’s calculated based on a home’s open market property value.

The number isn’t a set percentage or fixed rate but is calculated on a sliding scale. Stamp duty varies throughout Australia, but here are the standard costs likely to apply to property in Victoria:

  • Property valued up to $25,000 will incur stamp duty of 1.4%.
  • Property worth between $25,001-$130,000 will incur stamp duty of $350 plus an additional 2.4% for every dollar over $25,000.
  • Property worth between $130,001-$960,000 will incur stamp duty of $2,870 plus an additional 6% for every dollar over $130,000.
  • Property worth more than $960,001 will incur 5.5% in stamp duty.

Recently, Victoria’s property prices have increased more than they have in the past two decades. For example, driven by government incentives and decreased interest rates, median house prices have increased to $941,000. Meaning the stamp duty is rising along with it.

In the throes of COVID-19 – where job insecurity is peaking, and income growth is slowed – that cost might be a bit too steep for many prospective buyers and property investors.

With that said, would Victoria’s state government entertain the notion of scrapping stamp duty to avoid financially overburdening citizens? And if they happened to, would there be potential pitfalls?

An Effort to Abolish Stamp Duty

 State ministers in Victoria (and New South Wales) have combined to make a bipartisan attempt at getting rid of stamp duty.

It’s believed by many experts that, since residential properties face the brunt of these rates, stamp duty acts as a detractor for potential homebuyers. Residents find themselves far less eager to downsize or move closer to work, school, or family.

Back in 2012, the ACT committed to a 20-year plan to phase out stamp duty. As of 2019, it’s been abolished for first home buyers and on commercial properties worth up to $1.5 million. With Victoria potentially following suit, what might be the result?

What is a Potential Pitfall From Abolishing Stamp Duty?

 The state government relies on a series of checks and balances to remain profitable and serve its communities. By taking away the stamp duty, there’s an immediate loss of substantial revenue.

With the government less profitable, that means less budget for initiatives that better the quality of life for Victorian residents. Taking away that revenue stream without bridging the gap means less money for schools, hospitals, roads, railways, and public transport. Really, that’s only scratching the surface.

To circumvent the loss, there would have to  be some kind of amendment to ensure that Victoria’s government doesn’t simply lose out on that money. After all, that would hurt residents in the long run.

Fortunately, it does appear that there is a superior method of amassing this revenue that will appease state governments while abolishing stamp duty.

 

How Can the Government Still Make Money While Property Investors Save Money?

 Economists believe that redistributing the land transfer revenue comes down to restructuring it as a land tax at a low percentage rate.

PricewaterhouseCoopers put together models weighing the impact of allowing people to either pay stamp duty upfront or land tax over time in lesser instalments. The work was based on the $50,000 median stamp duty in Sydney.

When land tax was chosen as an option, the savings proved to be more substantial over the long term. The primary reason for this was that purchasers borrow money to pay the stamp duty. Of course, there are the steep interest rates associated with loans and the decades it can take to pay it all off.

Given COVID-19’s adverse effect on the economy, prospective homebuyers and property investors are likelier to take out loans. Therefore, they are more vulnerable to falling into debt and will struggle to amass personal wealth.

Alternatively, spreading out the cost of stamp duty as a land tax in instalments gives property owners/investors the breathing room to not require a loan for this amount.

Thus, PwC’s models indicate that a median homeowner will save $10,000 over their lifetime by substituting stamp duty with land tax.

Furthermore, removing the stamp duty will generate a positive supply response. People will have added motivation to sell a property and purchase something else because they won’t be stuck with the sizeable upfront fee.

Could There be a Hidden Issue With Abolishing Stamp Duty?

 While many economists believe firmly in abolishing stamp duty, other experts do have their concerns.

For instance, the upfront stamp duty cost provides a transparent number that is paid right away. Whereas land tax can get a bit murky. The number can go up and down based on the state of the market. And property owners are stuck with those fluctuations for years to come.

All the same, you’ll find that most industry thought-leaders like Deloitte view stamp duty as something that stifles the market. As such, the overall consensus is that its abolition and redistribution into a land tax is a net positive.

Rhiannon Leonard is a property lawyer who assists clients with conveyancing and property development.

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