Podcast Transcript
Therese Raft
Welcome to a new season of Navigating the New Normal. Grant Thornton's podcast exploring trends in business and the market place. Today I am joined by Steve Paterson and Vince Tropiano, both from our tax team. Steve specialises in state taxes, including stamp duty, land tax and foreign surcharges. Vince leads our National Tax Governance team, advising on tax governance and tax risk management. Today we’re talking about a proposal which has just undergone public consultation to swap stamp duty for land tax in NSW and what this may mean for NSW property owners long into the future. Welcome Steve and Vince!
Steve Paterson
Thanks, Therese.
Vince Tropiano
Thank you, Therese.
Therese Raft
As the saying goes, “In this world, nothing can be said to be certain except death and taxes”. So we all pay taxes. It's part of everyday life. Why is this one particularly special?
Steve Paterson
Well, I think this one is special because it's the real first attempt the state has in relation to taxing the family home. And that's quite a big shift in the way in which state taxes have operated, probably since the last big shift, when the state's lost their right to levy income tax at the end of World War 2. And so we've got a situation where, rather than paying a one off large stamp duty amount on the purchase of a home, that all homes would be brought into a property tax with an annual tax paid on that home,
Therese Raft
I've also heard that this is meant to help with affordability. Is that one of the drivers behind this change as well?
Steve Paterson
There's a couple of drivers behind the change. Firstly, I think it is in relation to smoothing the tax that a state can have over a long period of time. Stamp duty is quite a lumpy tax, and it really only applies in relation to where the property market is hot and therefore there's a lot of revenue. But if the property market is a bit stagnant, then there is a decline in revenue for that year. So a property tax is actually designed to smooth that, and they make it a lot more transparent and a lot more, I suppose, predictable in relation to what the state's tax space is in any given year.
Therese Raft
So you touched on revenue. And this sounds like a particularly good way of capturing more revenue. Any chance this is in response to the COVID drain on the state purse?
Steve Paterson
Well, the mantra, I suppose that the government is using, is it is replacing one tax with another. It's not intended to increase revenue. But I suppose that all then comes down to a transition. It takes quite a bit to transition from one tax model to another. So what the expectation is, is that in the first few years, at least, they will be, a lot less tax being obtained by government. But over the longer term, it's supposed to smooth that out.
Vince Tropiano
Steve, I think that that's an interesting point when you talked about the movement in the property market, albeit that the property market is flying high at the moment, we would expect that there'll be dips. You know they'll be highs and troughs. What this may do is that – obviously the government collects revenue with the upfront stamp duty, but then when the mark that starts to move in a…it starts to move downwards (which everyone expects sooner or later it will) what this will do is probably provide a more consistent revenue stream to the government. So rather than big bangs – when people buy and sell property, all property owners will be paying their amount of property tax over the –over the lifetime in which they hold the properties. So it might provide a more regular stream of revenue for the government, independent of spikes in the property market, because I think it's more connected with the value of the land as much as property, which is the intention.
Steve Paterson
Absolutely. That's exactly the intention.
Therese Raft
And, Steve, we've had a chat about this before, so I know you think that this is – that a land tax is actually a more efficient tax in the long run. But what does that actually mean for those of us, like you and I, Steve, who have recently purchased property?
Steve Paterson
So if you've just purchased property, really nothing changes. The way in which the New South Wales government proposes to transition from stamp duty to a property tax is for people to opt in on the next sale. And so you have a choice, I suppose, on that first sale as to whether you pay your stamp duty, which is a one-off known tax or your elect not to do that and pay a much smaller annual property tax, but that will be there for the length of time that you own the property. So really nothing – nothing really changes for those of us who have just bought our forever home. That won’t be subject to the new tax. It will only come to bear in the event that someone wants to buy a new house after the property tax is introduced.
Therese Raft
And that's actually a really excellent point you've just made there, because obviously you have just bought your forever home – or what you're hoping will be your forever home. I certainly haven't, and many of us may be looking to move in the next few years. So would you expect to see perhaps a lot of people looking to sell during this transition period because they want to avoid a land tax?
Steve Paterson
I don't think so. I mean, I think the idea of the opt in, particularly in this first generation of sales, is that everyone will have a choice. So it will be up to the individual or the family to determine whether is it better to pay the one off stamp duty now, or do we elect to go into the property tax system and pay that annual tax over time.
Therese Raft
Well, I think the obvious next question is, how do you know which is the right choice?
Steve Paterson
Well, I mean that is the million dollar question. The one thing about stamp duty – yes, it is large, but it's known. So you have a lot of certainty as to what the amount is, and you only have to pay it once. An annual property tax, though, has two influences. One being what the rate is at any given point in time and the other being the land value. And I suppose those two are relatively unknown. While we may have an introductory tax rate to begin with, that's not necessarily going to be there forever, and also the value of property changes over time. So it is actually quite difficult to model that that sort of a tax. But I suppose then looking to a first home buyer, if you've struggled for the last number of years to save up a deposit, save up your stamp duty, it's quite attractive, at least in the short term, to opt into the new system and pay a much smaller property tax, albeit it's every year.
Therese Raft
Vince, do you have any thoughts on that?
Vince Tropiano
Look, I think it's interesting that – it's a difficult concept trying to work out whether or not you want to jump in or not. Will it change behaviour? I think it will. I think there will be those that may want to, as Steven alluded to, undertake an acquisition, pay your stamp duty and get it over and done with. Others might think that - and certainly in the current property market – they'll run with the hounds for want of a better word and just wait and see what happens. And given the current value of property, stamp duty is a fairly substantial cost when you’re purchasing the property now. So they may be better off holding off and then buying at a time where, rather than that upfront liability which many of us borrow and add to our mortgage – which means it's not just the cost of the stamp duty, it's the cost of financing that and stamp duty over 20 years old so you could probably do the maths and it might be better off paying the property tax as of when it comes in. Albeit, we don't know how much it will ever end up being because these numbers tend to change over time, like all tax rates.
Steve Paterson
It's also interesting as to what cycle the family is in at any given point in time. If people realise or are buying a property that they only intend to live there for the next 5 to 7 years, again could be very attractive to opt into the property tax system rather than paying the one-off stamp duty.
Therese Raft
I'm so glad that both of you have touched on time just now because I must admit I'm a little bit perplexed. The transition to a land tax could take what appears to be an impressively long 20 years. Why do we need that length of time to make that transition?
Steve Paterson
Well, it's actually a lot more than 20 years, Therese. The government predicts that only half of the New South Wales land will enter the property tax system within 20 years. And so we're looking at a 20 to 50 year time horizon, at least on the current model. The reason for the long transition is, I suppose, one of fairness and one of equity – insofar as a lot of people have paid a lot of stamp duty to buy the house that they currently live in. And it would be seen to be unfair to then try and tax those same homes again. Now, I suppose the other side of the coin and you've got fairness, but then you have this very, very long transition period. And I think the other idea that the government has is that ultimately they need to sell this to the voting public and to have a system where the decision is in the hands of the buyer. You choose whether you opt into the new tax or not. Then you're giving, I suppose, power to the buyer in order to make that choice rather than it being imposed on you. I suppose the trade-off for that is that you've got a very long transition period.
Therese Raft
Wow. Did not realise that it was only half in that – in that 20 year period, which I suppose means my daughter and Vince, you've got a child as well, when they grow up, they will still potentially have to make that decision for themselves to either opt in to land tax or a continue with stamp duty.
Vince Tropiano
Yeah, potentially.
Steve Paterson
And I suppose – and that’s the interesting thing I'm finding with all of the rhetoric that is going on at the moment, everyone seems to be quite focused on the immediate consequences of the commencement, where effectively, everyone will have a chance to choose to opt in or not. Fast forward 10, 20 years from now, if someone previous to you has opted into the property tax system, it stays there. In the 2nd 3rd generation of sales there may well not be a choice. And so, looking at the future first home buyers – the kids of today – my gut feel is that those are the houses that will absolutely go into the property tax system first and they probably won't have a choice when they're making their first home purchase in 10, 15, 20 years time.
Therese Raft
The ACT’s actually already undergoing this process, aren't they?
Steve Paterson
Yes, so they're in year nine of a 20 year transition period. So, which seemed quite long when, when that first commenced, now seems quite short compared to the New South Wales model. And the way in which they've done that is through effectively a forced increase in land tax, or what their rate systems are, with the gradual decrease in stamp duty over time. And I suppose what you're finding is that it's really now beginning to hurt in relation to the amount of the increases that people have seen in their rates over the last eight or nine years and particularly those who had just bought a house prior to the transition period who paid stamp duty on the way in as well. So comparing the two, you might well say that the ACT is a bit more unfair than the New South Wales proposal, but it's over a much shorter transition period. Interestingly, though, the rates have gone up so quickly after the first few years of that transition period, there is currently a freeze or a cap on how much the land tax can increase over the next few years.
Therese Raft
Would they be looking at doing something similar in New South Wales, or is that not necessarily as required because it's a much longer transition period that they're looking at?
Steve Paterson
I think the political concern is to get the property tax in – to implement it. What I suspect, or what I feel might happen, is that once it's implemented, you might see some pretty significant changes in a fairly short time horizon, say over the next 5 to 10 years. Once a government has taken the political pressure off introducing a new tax system, then it's much easier for a later government to make some substantial tweaks to that. So, for example, to remove the choice, to remove the opt in aspect of it, in the future.
Therese Raft
So definitely a bit of a wait and see for home buyers. But if we look at the other side of the pendulum, this will also impact on business properties as well. So we're talking shops and warehouses, workshops, development sites. How does a land tax that has been spruiked, in theory, to help with housing affordability play out for businesses?
Steve Paterson
Well, all land is caught in the new system, and all land has the benefit of the opt in system. I would love to hear Vince's thoughts as well, but my gut feel in relation to businesses is that they would be much more attracted to opt in and to have an annualised property tax over time rather than an upfront stamp duty payment.
Vince Tropiano
I think there's a number of moving parts here that could impact on the property owners as well as the corporate tenants. Obviously, most businesses tend to rent rather than own their own properties. What you might see there is that if landlords acquiring properties or have acquired developed properties and have a property tax liability or an annual property tax liability, you would expect that would be factored into the rent levels that would go through to their corporate tenants. And that might be slightly at odds with the landlords that have held properties for a long period of time, where they're not subject to the annual property tax, and may have paid stamp duty well in the past. Logic would suggest to me that those property owners would probably increase the rents as well to whatever the market value might be, if it factors in the property tax.
So for corporate tenants, there might be an increase in rent - a lot of it depends on market availability and the like, but all things being equal, there may be an increase in rent to factor in that increasing property costs for the landlords. For corporates that we're looking to buy their own property then there’s obviously – there's a question as to how they factor the cost in – and there is a slight difference from an income tax perspective. If you're buying a property, the stamp duty will form part of the cost base of the capital gains calculation, so there's no immediate tax deduction for that. But if you're buying the property, factory, whatever it is, the property tax should be deductible on a year by year basis as opposed to stamp duty, which would only come into play as a deduction when you sell the property.
So you know there's a there's a slight difference there, and they may find that the property tax may become more attractive prospect because it would be tax deductible year on year rather than an upfront cost on the stamp duty as well. So it cuts down there up-front costs if they're acquiring property and moving into a new factory or the like.
Property developers would have these issues and should start to think about this as well. They would probably opt in on the basis that they won't hold the properties for any length of time. They would literally buy, develop and sell as quickly as they could so they could avoid the stamp duty and then avoid that that annual property tax. So, you know, there's a few different parts here.
I think, in the end, as Steve's alluded to, it will all be part of day to day business, but certainly during transition periods and for existing property owners, it might impact on the decision making in terms of when they buy, sell, develop, and the like.
Steve Paterson
Interesting, Vince. Just in terms of tax deductibility, does that mean that the Feds will actually be funding 30% of this through increased tax deduction?
Vince Tropiano
Potentially, Steve. Any company would be claiming their 30% or the 27.5% of whatever tax deduction for the property tax costs. But as I said, the stamp duty would come into play as a deduction when properties are sold. But you know the properties aren't sold every year, so if you're buying a property, you're not going to get that stamp duty reduction in tax liability every year. It's only when it's sold and people might hold property for 5, 10, 20 years, whatever it might be. Whereas your annual liability will be somewhat reduced by the tax benefit you would get on those tax deductions.
Therese Raft
That's really interesting – you were just talking about how this might influence decisions around, I suppose, when you would buy or sell. But would it also influence where you buy, particularly in reference to looking at the different states? Would a land tax make New South Wales a more attractive destination to invest in property?
Steve Paterson
Well, I think the first and foremost issue, just in relation to the landscape we see ourselves in with land in Australia is price. So you see a very large disparity of land value around Australia, with obviously the highest being in Sydney, and then petering out into the regional areas, and less in other states as well. So I think, I think price is always going to be the first and foremost decision making prospect along with where you need to live in order to have the lifestyle that you want and have the employment that you want.
Will a new property tax influence movement in terms of crossing borders? I suppose in that respect, I'd be very interested to see what will happen when people start to retire. So when people are wanting to downsize and, I suppose, liquidate the capital gain that they've enjoyed through their existing home, will they elect to remain in New South Wales and pay an annual property tax through retirement? Or would they move somewhere a lot more cheaper, a lot warmer? Pay one off stamp duty and then that's tax free for the rest of their life through retirement. So it's going to be quite interesting, and particularly whether, for example, we're going to have a return to a bit of a migration up to Queensland, which is what we saw when Queensland abolished death taxes.
Therese Raft
Here's a leading question for you, Vince. You have an interesting theory about land tax in relation to death duty.
Vince Tropiano
Well you wonder whether this – and I know it's been alluded to in some circumstances as, ah, death tax by stealth. Given that a lot of people use their properties as retirement funds or property which gets passed on to family members, which then would be subject to these property taxes ongoing, when there's no such liability at this point in time. So there is a suggestion that the family home today, which has none of those liabilities, may then become a property which is subject to ongoing property tax as a nice revenue collection system for the governments
Steve Paterson
Just to give you an example of how that might play out. But particularly with someone who is, I suppose, asset rich and cash poor during retirement. It doesn't have the cash flow to fund the property tax. The suggestion is that reverse mortgages may be available to be able to fund that. So, in other words, the tax eats into the equity of the house and is then paid when the house is next sold. Now, obviously that means, ultimately, that either happens in the inheritance phase and may well mean that during inheritance, that house must be sold in order to pay their outstanding property taxes.
Therese Raft
I wanted to touch on something that you've both spoken about a little bit before we were talking about home buyers, and that is that idea of lifestyle and where do people want to live. New South Wales has always been an incredibly popular destination for foreign property buyers, but also immigrants looking to move to Australia. An annual land tax would seem to make it harder for non residents to get onto the property ladder here.
Steve Paterson
I don’t think it will make it harder. I think it would be, if anything, I'd probably think it make it easier. The issue that immigration and foreign persons will have is the same one that they have today. And that's whether the foreign surcharges will continue to be payable by foreign persons, and just to kind of reiterate in relation to surcharges, that’s more than double the tax that Australians pay. And we have heard very, very little from the government in relation to what they intend to do with foreign surcharges. But generally, when the government doesn't say much, that means that it's not great news for the taxpayer, and my feeling is that foreign surcharges are here to stay, and if that is the case, then that will make it much harder for them – as it is today – to be able to buy property.
Vince Tropiano
Yeah, I think I think you're right with that, Steve. I'm not sure it's going to change their landscape that much. It's not going to make it any harder than it is today – I think that’s certainly the case.
Therese Raft
So at least New South Wales can try and retain that spot as one of the most attractive, if not the most attractive destination in Australia for people to settle.
If I can ask you both to kind of cast your minds well into the future. We know that the ACT is already undergoing this transition. New South Wales is currently investigating it. Will the rest of the states follow? Should they? And should we just get rid of stamp duty altogether?
Steve Paterson
Look that is very interesting. I would, I would expect that the other states are watching very closely as to what happens in New South Wales and the dynamic that that causes. A couple of things just in relation to what we've observed over the last 10, 20 years just in the way stamp duty has evolved. In that when a state moves to either increase a rate or expand the tax base, what you find is within five years, all the other states have followed suit. So there is certainly a trend of one state taking the lead and the others following. Whether that happens in the property tax, I think will really largely depend on where the – where the state sees its growth. So, for example, if Queensland bets, for example, that it will be the home of the retirement off the baby boomers, then it may well not introduce a property tax there to encourage people to move to a much lower price home and much lower price stamp duty and no property tax.
Vince Tropiano
One of the interesting things – I think I saw a survey and stamp duty is one of the most disliked taxes, because for a lot of people, it comes at a time – it's a fairly stressful environment, looking to purchase a property. And then adding a fairly hefty stamp duty bill on top of that is something that people really dislike. So I think, possibly – initially, people might see a regular property tax as been a less painful alternative to the upfront stamp duty. It's the buy now pay later sort of philosophy. The question is how much that becomes over a 10, 20, 30 years, or whatever it might be when you buy new forever home, or even if you're just buying and selling, and trading up. So I think that it is something, that as Steve said, the other states will look at. I imagine that if it works here, remembering that it's meant to be revenue neutral – it's not, you know, the argument is that it's not collecting more revenue than the existing stamp duty – but I think a lot of punters will find this appealing in that they don't have that upfront liability and they'll be willing to wear a more regular liability over a period of time. Whether they feel so well disposed towards it after 10 or 15 or 20 years of owning a property and still paying that property tax is where it starts to get a little bit problematical.
Steve Paterson
Yeah, the cynic in me, Vince, is I think the rubber will hit the road at the next New South Wales election. So if we find ourselves with a new implemented property tax and the government is nevertheless reelected, I think that's probably what more of the other states governments will be looking at.
Therese Raft
So I guess it's a bit of a wait and see, just in case all the other states are watching now what that might mean for them in the future.
Well, Steve and Vince, thank you so much for your time. Steve, you are actually quite vocal about this topic on LinkedIn, so I think I can anticipate the answer for you here. But are you both happy for people to reach out to you on social or email to continue this conversation?
Steve Paterson
Absolutely. And everyone is coming at this with a very different perspective. So it's quite interesting to speak with many and varied people in the community and understand how they're feeling about this and how it may impact them.
Vince Tropiano
I can reiterate that. I’m happy to chat about this. It is a big change in the tax environment and that gives rise to all sorts of weird and wonderful questions, and different scenarios.
Therese Raft
Well, once again, thank you both so much for your time.
Steve Paterson
Thanks, Therese.
Vince Tropiano
Thanks very much, Therese.
Therese Raft
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