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New South Wales’ plan to replace stamp duty with a land tax could slow housing-market activity during the changeover to the new tax regime, as people could delay buying until they can avoid the up-front stamp duty cost, economist Shane Oliver told The Australian Financial Review.
However, while the change could slow sales in the short term, sales would likely spike once the land-tax policy took effect and people were able to save tens of thousands of dollars, AFR reported.
“It could have a distortionary downward effect in the short term, and upward beyond that,” Oliver, the chief economist for AMP Capital, told AFR. “People may think, ‘I have the option of paying over time,’ so will wait. It could take the edge off demand in the short term.”
The state says the move will make homes cheaper and boost economic growth by $11 billion over four years, according to a report by The Australian.
However, the development industry warned that a lengthy transition period between the two regimes could further depress NSW’s already weakened development pipeline, AFR said.
“With reforms slated for late 2021, homebuyers could hold off on purchasing until they have more certainty, which could effectively stall the industry completely,” Steve Mann, NSW chief executive of the Urban Institute of Australia, told AFR.
Economist Warwick Smith, who co-authored a report on the Australian Capital Territory’s 20-year staged replacement of stamp duty with land tax, said that in ACT investors were more likely to delay purchases than owner-occupiers.
“Most … owner-occupiers are on a trajectory anyway,” Smith told AFR. “In the shortish term I wouldn’t expect it to shift behaviour. But it could well shift the behaviour of investors who tend to a much more careful and calculated decision about the cost-benefit of different options.”
However, Oliver, Mann and Smith all welcomed the move towards what Treasurer Dominic Perrottet called “the single most important economic reform we can tackle to turn the Australian dream into NSW’s reality.”
Perrottet did not end stamp duty in his delayed state budget on Tuesday. Instead, he began consultation on a model that, if it won sufficient support, could be put in place by the second half of 2021, AFR reported.
But Oliver said that the COVID-19 pandemic, which triggered the postponement of the state budget, also accelerated the need for change.
“The coronavirus crisis is encouraging thoughts about how do we set things up to be more efficient in the economy, to operate in a more effective way,” Oliver told AFR. “Stamp duty is a ridiculous distortionary tax that stops people from transacting. It makes it difficult for younger people to get into the property market, as they’ve got to have it upfront.”
However, the switch from stamp duty to land tax wouldn’t reduce the tax burden – just shift it, Charter Hall chief executive David Harrison told AFR. Harrison said that while the elimination of stamp duty would make it less expensive for investors to buy assets up front, higher land tax payments would lower distribution to its members.
“If you’re going to reduce the income, the dividends going back to the shareholders and the superannuation members that own REITs and own unlisted funds, you’re just taxing Australians in a different way,” Harrison said.