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Land Tax Makes Progress in Australia with New Law

Land Tax Makes Progress in Australia with New Law

In a certain sense, Australia was built on a land value tax. In fact, at the formation of the nation in 1901, a land value tax had already been in force in South Australia and New South Wales for about 20 years, with some jurisdictions taxing the value of raw, unimproved land and others, the value of improved land. Less, than 10 years after nationhood, the federal government expanded the land value tax nationally, which lasted until 1952. It was then relinquished to the states, where exemptions, low rates, and changes in land ownership and use over the decades rendered it increasingly insignificant. 

Fast-Forward to 2024, and the land value tax is starting to flex its muscles again in the form of the State Taxation Acts and Other Acts Amendment Act 2023, which came into force in the state of Victoria on January 1, 2024. Much like other land value tax acts around the world, one of its primary goals is to reward the development of unused land—or nudge its owners to sell the land to those who will. In this case, the law will apply a “vacant residential land tax” to residential land in Victoria if that land is left vacant for more than six months in the preceding calendar year, with the counting starting in 2024. That tax rate will be progressive, too, increasing by 1% according to the number of years that the land is liable, starting at 1% for the first year, 2% for the second year, and so on.  

The law also marks a significant return — or reformation — of the land value tax in Australia, as it represents one more major effort to replace the long-hated Stamp Duty, a one-off fee the buyer must pay when ownership of a property is transferred to them. Before the Victoria law, only the Australia Capital Territory, the smallest governing territory in Australia, had replaced the Stamp Duty with an annual land tax, although that’s a 20-year process that it’s only halfway through now. New South Wales had passed an optional land tax in 2022, but it was repealed the following year.

The Stamp Duty charges home buyers a fee according to value brackets, with the lowest at 1.25% and the highest at 5.5%. Properties valued at more than AUD $3,101,00 pay an additional 7% for every dollar of value above this threshold. Unfortunately, the result is similar to property tax determiners in the United States, discouraging the development of property, curtailing mobility, and disproportionately impacting low-income populations and first-time buyers. 

Most economists are cheering Victoria’s move, too. This follows numerous reports showing the benefits of replacing the stamp duty with a land tax. Modeling by the Centre for Policy Studies at Victoria University in 2022, for example, found that the shift would push down the price paid by buyers by about 4.7%, making home ownership easier. A 2018 report by the Grattan Institute found that “shifting from stamp duties to abroad-based property tax could make Australians up to $17 billion a year better off.” This boost to GDP is echoed by the Victoria University report, which concluded that after 20 years, the land tax would boost national income by AUD $0.30 for each dollar of revenue swapped with the Stamp Duty, about 0.34% of annual gross domestic product. 

Despite being extremely unpopular, the Stamp Duty remains in force throughout much of the country, as no state government, other than the ACT, has managed to balance the politics of a new tax with a revenue neutral transition plan. “The problem is that in order to transition from Stamp Duty — a large upfront tax on property transactions — to Land Tax — a low, recurrent charge on the value of land holdings — the government revenue needs to take a short-term hit,” explains Emily Sims, general manager of Prosper Australia, an independent, non-profit association that promotes land taxes.

Prior to Victoria’s move, Australia’s other territories had already sought to offset the Stamp Duty in other ways, primarily with exemptions for first-time home buyers. For example, in New South Wales, the coalition government removed the Stamp Duty on properties worth up to AUD $800,000. Another law there allowed first-time home buyers the option of paying an annual land tax instead of the stamp duty for properties valued up to AUD $1.5 million. 

Critics of this, though, say that offsets like these are little more than grants and won’t benefit the economy or solve land-use issues in the long term. Nor does it generate any of the funds needed to replace the amount collected annually by the Stamp Duty — about one-fifth of their tax revenue — that’s so critical to funding hospitals and schools. In other words, such exemptions only plaster the wound, rather than healing it. 

Plus, as Sims points out, “If you try and manage the politics of a new tax by ‘switch on sale’ which is only charging land tax on a property that changes hands (when a stamp duty is charged), you run into some big problems.” These include losing too much revenue, poorly targeting this cost at the real transitional inequity, and creating a disincentive to transfer property, as Proper Australia pointed out in its 2019 report, Stamp Duty to Land Tax: Designing the transition.

The Victoria law, then, represents a way forward for the rest of the country if successful. It also marks a symbolic step toward the findings of the so-called 2010 Henry Review. Commissioned by the Australia Treasury, the report recommended a land value tax so long as it’s broad-based. “Existing land taxes are quite inefficient because they are not broadly based,” the report notes, “An efficient land tax would apply equally to all land uses and aggregate holdings, but could have a threshold and different rates based on the value per square metre of land.”

For Sims, the conclusion to draw is that state governments will continue to implement the Henry Review recommendation to switch from stamp duty to land tax and will continue to do so because land value taxation represents that ‘best tax on the books’ in terms of deadweight loss and economic benefit, fairness, as well as the positive ways it shapes land and housing markets by reducing speculation.

“Australia’s economic base has always been and remains a land and natural resource taxing country,” Sims concludes.

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