Taxation, Property

17 Jul 2003 questionsarchive

I seek leave to make a brief explanation before asking the Minister for Agriculture, Food and Fisheries, representing the Treasurer, a question regarding stamp duty on property sales and land tax.

The Hon. J.M.A. LENSINK: Excessive taxation places a heavy burden on our community and the economy in general. An active property market is essential in providing employment in the building industry and other related trades.

Excessive property taxes will particularly harm low and middle income earners in terms of their ability to purchase property, and may have the effect of depressing the market in the medium to long term. For instance, some younger people who are part of the generation that has already been forced to pay more for their own health and education— which I do not disagree with; but I just remind the baby boomers of that point—may have missed the boat of purchasing property before the recent property boom, with their only option being to pay other people’s mortgages through rent.

Young families needing more space may be forced to make do with their existing small property because they cannot afford to upgrade. Older people, who are providing for their own retirement, also suffer disadvantage because these taxes are a cost that will come out of their income, regardless of whether they hold equity in a property trust or whether they derive income by renting out investment properties.

Under budget figures released by the Rann government, a $222 000 property, which is the current median price, financed by a $200 000 mortgage, will incur stamp duty on the conveyance and mortgage duties of approximately $7 700 and approximately $700 respectively. This is a total of about $8 500, which more than removes any relief provided for first homeowners through the federal government’s first homeowner grant. The Treasurer’s own budget papers advise that land taxes in South Australia this year will rise by almost $30 million to $186.6 million, a  taggering increase of more than 15 per cent. My questions for the minister are:

1. Will the government support the removal of stamp duty when it is reviewed, as part of the GST deal by the Council of Australian Governments, in 2004-05?

2. Does the government intend providing any relief, by taking a little less with its left hand from what the federal government provides with its right hand through the first homeowners grant?

3. Is the government doing anything in the interests of young and older South Australians providing for their own future by addressing the widening affordability gap aggravated by state property taxes and stamp duties?

4. Could the government outline what specific services, if any, revenue from property taxes are used to fund?

5. What will the government do to prevent property taxes from potentially stagnating the South Australian housing market and dealing a crippling blow to the state’s economy?

6. How can the government justify an increase in land taxes at a rate well above the rate of inflation?

The Hon. P. HOLLOWAY (Minister for Agriculture, Food and Fisheries): I will refer those questions to the Treasurer, but I would just make some comment, particularly in relation to the latter question. If the income that the state receives as a consequence of property taxes increase, it is due to either an increase in the number of properties that are sold or, alternatively, and most importantly, an increase in the value of properties. So, essentially, the reason why there has been a significant increase in stamp duties in recent times is the rapid increase in the value of properties.

It is an interesting economic argument, but I think one could say that, even if one were to remove duties altogether, it is likely that the value of that tax would soon become capitalised into the value of the property anyway. After all, I think most economists would conclude that people pay to their capacity in relation to housing and, of course, stamp duty is built into the price of property. I will refer those questions to the Treasurer, who has responsibility for these matters, and bring back a response.

Thursday 27 November 2003

In reply to Hon. J.M.A. LENSINK (17 July).

The Hon. P. HOLLOWAY: The Treasurer has provided the following information:

1. Property taxes and in particular stamp duties contribute significantly to State revenues and are essential in maintaining the Governments ability to provide services such as health and education to South Australians.

Under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (IGA) the Ministerial Council will by 2005 review the need for retention of various stamp duties after 1 July 2005. However it should be noted that the review of State taxes stipulated in the IGA includes the review of stamp duty on non-residential conveyances (business transactions), but does not include a review of stamp duty on residential conveyances.

Government support for the removal of stamp duties under the IGA will depend on whether funding via GST revenue and other forms of Commonwealth funding is of sufficient magnitude for the State to continue to provide the necessary services to the community.

Current estimates suggest that South Australia will receive less from GST revenue net of collection costs than it used to receive from financial arrangements applying before GST commenced up to and including 2005-06.

2. The First Home Owners Scheme (FHOS) grant is designed to provide some relief for the impact that the introduction of GST has on the cost of a new house and the replacement cost of an established house. There is no connection between the FHOS grant and conveyance duty which has applied for many years prior to the GST.

3. It is acknowledged that the buoyancy in the property market in recent years has led to an increase in property prices in South Australia, which has had an impact on the affordability of properties for first homebuyers.

The Government welcomes the recent debate on housing affordability and the announcement by the Commonwealth Government of a Productivity Commission inquiry into the affordability and availability of housing for first homebuyers.

However claims by the Commonwealth Government that the source of the problem, and consequently the solution is the property taxes collected by the States is inaccurate. The recent boom in the property market and increase in property prices has been fuelled by the impact of the introduction of the GST, the temporary doubling of the FHOS grant for new houses, low interest rates and other economic factors such as consumer confidence and investor preference for real estate given the volatile stock market.

There has been a very high level of property purchase by first home buyers in South Australia since the inception of the FHOS, indicating that the decrease in affordability has been more than offset by the incentive to purchase a property due to the availability of a FHOS grant and to take advantage of low interest rates. The number of first homebuyers purchasing properties dropped in 2002-03 and is expected to drop further in 2003-04; this drop off reflects the “pull forward” effect of the FHOS rather than affordability effects.

4. Revenue from property taxes is not used to fund specific services, it is absorbed into the general pool of revenue which the Government uses to fund a wide range of services.

5. A slow down in the property market will not be caused by property taxes collected by the State. It is more likely that a slowdown would be caused by the aftermath of the “pull forward” effect recently occurring possibly in combination with one or more of the following possible scenarios; an increase in interest rates, lower consumer confidence, a switch in favoured investment options away from property, a slowing of the national or international economy.

6. The land tax rates and structure have not been changed. The expected increase in land tax collections between 2002-03 and 2003- 04 reflects the actual growth in land values, which have been well above inflation. The increase in land values in turn is reflected in significant capital gains benefiting the owners of the investment (nonprinciple place of residence) properties which form the land tax base.

The State Budget has benefited from the increase in land values via the increase in land tax receipts in recent years. However prior to the current period of strong growth in land values, land tax receipts from non-Government entities experienced low or negative annual growth. In aggregate land tax receipts grew by only 3.7 per cent between 1995-96 and 2001-02, on average approximately 0.6 per cent per annum, far below the rate of inflation.

Consistent with the long term experience of low levels of growth in land values followed by short periods of strong growth it is not anticipated that recent high levels of growth in land values will continue in the long term.