NSW land tax and stamp duty debacle again shows how politics trumps policy

Politics can lay waste to the best of intentions and grandest of ambitions. Nowhere is this better illustrated at the moment than in New South Wales.

Incumbent Premier Dominic Perrottet has been something of a land tax zealot for many years, throughout his time as treasurer and when elevated to his current role.

It’s dangerous political territory to be seen as pro-tax, especially when that tax is on the family home.

Perhaps that’s why, with an election looming large just months away, his government bottled it on land tax reform.

Rather than Perrottet’s original grand designs of transitioning New South Wales away from stamp duty and onto land tax, his government passed a “reform” that retains the worst element of stamp duty with the biggest risk of a move away from it.

The government’s scheme, which took effect last week, allows first home buyers who purchase properties worth up to $1.5 million to either pay the existing stamp duty up-front or opt for an annual land tax for as long as they own the home.

NSW land tax and stamp duty debacle again shows how politics trumps policy
Both major parties are offering first home buyer tax discounts ahead of the NSW election.(ABC News: John Gunn)

It’s a potential gain for first home buyers, who can now opt out of the two or more years of saving typically needed just to gather the roughly $40,000 stamp duty on a million-dollar home.

And, in theory, most may also end up saving money.

Relatively few first home buyers end up living in their property for more than a decade, and 10 years of land tax on a million-dollar home where half the value is the land will likely be a tad over $22,000, or close to half the cost of stamp duty.

If that million-dollar home was an apartment, the savings would be much bigger still because, unlike stamp duty, the land tax is levied only on the land value, not including anything built on it. With apartments, the land value is split among many individual units.

The potential savings grow further when you factor in the effects of inflation on the real value of money over time, and the interest savings the home buyer can make by not having to effectively borrow their stamp duty from the bank.

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Is an annual land tax fairer than stamp duty?

Subsidy for sellers?

However, when I say “may end up saving money” it’s because this theoretical calculation doesn’t account for the rise in prices the policy might induce.

As economist Cameron Murray argues, taxes like stamp duty are “economically incident on the seller” even when the buyer is the one actually paying them.

Here’s how he explains it:

“Homebuyers are paying the maximum they are willing.

“Whether that payment is directed to home sellers, or the government via stamp duty or land value taxes, has no effect on the underlying property market dynamics of rationing via prices and the costs buyers will need to pay.” 

In other words, if home buyers don’t have to pay stamp duty up-front, they can put that money towards bidding more for their preferred property.

Rather than benefiting first home buyers, Murray argues this type of scheme is likely to further enrich existing owners.

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