The lowdown on stamp duty reform

by Madison Utley01 Jun 2020

The conversation around stamp duty reform has gained momentum in recent weeks at both the state and federal level, with everyone from RBA Governor Phillip Lowe to Treasurer Josh Frydenberg to state politicians suggesting that land tax reform may have a role to play in Australia’s post-COVID economic recovery.

Reform could significantly aid homebuyers through reducing the amount of money they need to have saved up front, as they're not able to borrow against stamp duty but instead must pay it in cash.

As reports continue to swirl that an overhaul to land tax may be imminent, Australian Broker unpacks what that change might look like. 

The current situation

While discussion around stamp duty reform swells and ebbs on a fairly regular basis, when it comes down to it, it’s widely viewed as “untouchable”– especially in Victoria where it makes up 40% of the state’s revenue, according to Damien Roylance, managing director of Melbourne-based Entourage.

“We’ve always talked about stamp duty reform, but the thing is the percentage of stamp duty hasn’t changed since the ‘70s when the median house prices were 30-odd thousand. It was never adjusted down as we moved into the 2000s and house prices obviously increased,” Roylance said.

Pre-COVID, it was projected that stamp duty would generate $9.5 billion in revenue for Victoria this year alone. 

However now, with the hope of reform feeling more like an actual possibility in recent weeks, buyer behaviour is being affected.

Roylance explained, “A lot of agents are screaming ‘Just make a decision on it!’ because if people think reform is coming, they’re worried they’re going to hold off buying. With a million dollar purchase, which is not uncommon these days, the stamp duty is $55,000. If people think change is coming, why would they buy now when they could save that much down the line?”

Possible approaches to the reform

Even with his pragmatic acknowledgement that a reduction in tax in one place almost surely equates to an increase in tax elsewhere, Roylance has considered several alternative structures for stamp duty which would take pressure off owner occupiers without depriving the state its revenue.  

“Paying stamp duty over a deferred period, say 10 or 20 years, would be a lot better for a lot of people from a cash flow point of view. Rather than paying $50,000 in one go, a homebuyer might instead pay $2,500 a year for 20 years,” he explained.

Roylance also outlined a credit system which would help address the way in which stamp duty sometimes discourages people from transacting more.

“Say you buy a home for $1m dollars, and you pay your $55,000 stamp duty. Then you upgrade to a home for $2m in the next few years, but you're given a credit for the first move you already paid for,” he explained.

“The buying and selling of property is so expensive. If you’re able to have a credit system like this, young people moving up the property ladder can pay their stamp duty along the way. So when they buy their big home for $2m or $3m, they’ll have already paid a big chunk of that tax. 

“There’s a lot to flesh out there, obviously, but a credit system could help prevent people from having to pay it all again.”

While Roylance doesn’t necessarily feel stamp duty should be lowered or altered for investors, he does see significant room for improvement especially as it pertains to helping first home buyers into the market.

“The first home buyer stamp duty concession is pretty low, tiering between $600,000 and $750,000 in Victoria, but we have first home buyers buying for over a million. Times have changed; they’re now in their thirties, just got married and they’re not looking to buy a $600,000 apartment anymore,” he said.

What we’re most likely to see

While it's interesting to model creative solutions which benefit both homebuyers and the government, tax reform is rarely radical.      

“Everyone expects the change to come in the form of a land tax increase,” said Roylance.

However, the managing director has also seriously considered the possibility that, despite the duty dominating the discussion of late, no change will be made at all. 

“Brokers aren’t seeing too many people drop off at the moment. Stock levels have been really down, so houses price haven’t really lowered. We’re seeing properties snatched up in days rather than weeks,” he said.

“If property prices are holding strong and people are still buying, do they need to do this? Obviously, reform is being considered as something to spark the economy and get things going again, but if it shows signs of life, why would they take away such a huge earner for the government?”