State Taxes: looking back to look forward

Rebecca Archer

Welcome to Navigating the New Normal – Grant Thornton's podcast exploring trends in business and the marketplace. I'm Rebecca Archer, and today I'm joined by Kristina Popova, State Taxes Partner focusing on stamp duty, land tax and foreign surcharges across all Australian jurisdictions. This year has been a bumper year for state taxes and stamp duty, and with a state election coming up, what can we expect to see? Welcome, Kristina.

Now, next year is an election year in New South Wales, how likely is it that the premier will make any significant stamp duty announcements if reelected?

Kristina Popova

Thanks for having me, Rebecca. It's a really interesting time for state taxes, and in particular for stamp duty in New South Wales. So, we've got a premier at the moment who's facing a reelection campaign and he's very much supporting push to move away from stamp duty to an annual property tax, and we've seen that implemented already this year with the introduction of the first homebuyer’s property tax. So, to give our listeners just some context, so the concept of the property tax, it was first announced in November 2020 as part of the State Budget, and the concept of the proposal – it focused on abolishing stamp duty and land tax and replacing these two taxes with a single annual property tax.

So that would give buyers a choice: they could elect to pay a known amount of stamp duty at the time of the purchase, or an annual property charge instead and that would, of course – is a bit of an unknown because it would fluctuate based on the value of land. So, to everyone's surprise, when it came to legislating the proposal, we saw a very scaled back version of what was initially announced. So, the main restriction is that the choice of paying the property tax – it’s only available for first homebuyers, and it's capped to a property value below $1.5 million. So, it will be available for mid-January next year, but it is possible for some owners to opt in retrospectively.

Rebecca Archer

So, would you expect the New South Wales government to try to expand the property tax to completely abolish stamp duty if reelected?

Kristina Popova

That's a really good question, Rebecca. So based on comments and public statements from the Premier, it's fair to say that it's no secret that he would like to see the property tax apply more widely than just to first homebuyers. However, I think the really big issue will be the impact to revenue. So, if we put the policy aside, and whether or not stamp duty is efficient or inefficient, an expansion of this property tax could be potentially a massive hit to revenue. So that would be the case, if it was to apply to land, other than residential land purchased by first homebuyers, and we've seen over years that where other states have introduced big changes to stamp duty, they tend to do that quite slowly. So reforms in the stamp duty space – they’re not entirely a novel concept.

So, in 2012, we had the ACT government, they began a 20-year program to modernise their state taxes system. So, over this period, they've pledged to abolish a number of taxes, including – eventually – duty on property transfers. But we've seen that it's been done gradually. So residential duty rates, they've been falling over time, but we've seen an increase to things such as rates. So effectively, it's been said that the outcome – it’s revenue neutral. So, I think to answer your question, if reelected, I would be surprised if the premier acts very quickly, in moving away from transfer duty altogether. The fact first homebuyers’ choice does provide that framework, and it really is the first step in many respects – it’s a big one.

We also have to bear in mind that these are very recent changes; they’re still very new. Legislation only passed last month, and the government – I think they'll want to see if it has the intended outcome on the demand for new housing before fully committing, and of course, that will take some time.

Rebecca Archer

Kristina, do you think that the property tax could actually be expanded to commercial property?

Kristina Popova

Now that's a really interesting point. So, the policy behind the first homebuyer’s choice is to lower the upfront costs of home purchases and to help boost the rate of home ownership. So arguably, that policy intent is not as relevant to commercial policy. Having said that, as I mentioned, the Premier has made his views on stamp duty being inefficient, very clear. What is also interesting is that when the announcement was made back in 2020, most commercial properties would have fallen outside of the criteria for the property tax and that was, you know, based on the criteria at the time. So, if we look at their original proposal and the much scaled-back version, it does seem to be an indicator that the government are very conscious about loss of revenue.

Rebecca Archer

So, let's head further south now to Victoria. Are there any new taxes on the horizon there?

Kristina Popova

That's really interesting you mentioned that because we know Premier, Dan Andrews, he loves to introduce new taxes. And a big part of the opposition campaign was that as Premier, Dan Andrews, he oversaw the introduction of over something like 40 new taxes or increases to taxes during his eight years.

So, the Premier, he did make an election promise of no new taxes. However, the really big change in Victoria that we'll see next year – it’s the commencement of the windfall gains tax, and this was, of course, legislated prior to Dan Andrews reelection campaign, and it's already law. And it originally did have a start date of one July this year but was deferred.

Rebecca Archer

Alright, so can you give us a little bit of information and maybe break down what exactly the new windfall gains tax is, and what it exactly applies to?

Kristina Popova

Basically, from 1 July next year, a rezoning of land and Victoria, that results in an uplift to the land value of more than $100,000 can be subject to a tax of up to 50% on the value of that uplift. So, like any new tax, there'll be a number of exclusions where there is a rezoning, and the rules won't be triggered, and the policy behind that is the fact that the government have recognised that they make planning decisions to rezone land and property values – they literally rise overnight. So, the government is of the view that these profits should be shared with the broader community, and it should be used to fund public services and infrastructure. So, a 50 per cent tax – that’s going to have quite a significant impact on those that are buying, selling or developing lands that is rezoned, and already we're seeing that it is affecting projects in Victoria.

Rebecca Archer

You mentioned that the start date for this was deferred, do you think it will actually proceed as planned?

Kristina Popova

Look, that's a really, really good question. The start date for this has been deferred by one year, and we have seen in the past that taxes can be scrapped after they're already legislated. However, it does seem over the last few months that the government are committed to the new tax commencing, and they are putting in some resources to get this off the ground.

So earlier this year, we saw some regulations that were passed, and we've also got the State Revenue Office of Victoria, who will be administering this tax. They recently issued some guidance – so never say never, but all signs do point to the tax proceeding.

Rebecca Archer

And of course, state taxes do vary from jurisdiction to jurisdiction. Do you think though that other states may follow Victoria's example and try to introduce something maybe similar to the windfall gains tax?

Kristina Popova

I think that's going to be a question on everyone’s mind, especially for practitioners around the country, and the windfall gains tax, it's unlike any other tax in any Australian jurisdiction. So, it's a novel concept in that regard, and it will be interesting to see if other states follow and introduce their own equivalent or a slightly different version. You'll recall Victoria was the first Australian state to introduce the foreign surcharges for stamp duty and land tax. And at the time, it was a very new concept – so similar to the windfall gains tax. So, most states – so starting with New South Wales, they slowly followed suit over time and now have very similar surcharges. Could the windfall gains tax be the new normal? I think we certainly can't rule it out, and I do think that is the case, especially where we have leaders such as the Premier of New South Wales, moving to push away from stamp duty.

Rebecca Archer

And moving again further north – this time in Queensland – this year, some proposed changes to land tax were met with a great deal of resistance. Now given that, how likely are land tax reforms in Queensland in 2023?

Kristina Popova

So, the proposed Queensland changes, they were probably the most controversial topic in the state taxes space this year, and I don't think I've ever seen in my years of practice, so many forms of media take such an interest in land tax in one particular state. So as our listeners may know, land tax, it's an annual state-based tax and Queensland tried to reform their system to move to a model so that instead of paying land tax based on land you own in Queensland, you take into account the value of your Australia wide holdings.

So that could have the impact of a landowner losing the benefit of the tax-free threshold, or also to push them up to a higher tax rate. So unsurprisingly, this was met with a lot of resistance from landowners around the country, and also from other states. So, we had the New South Wales Premier go as far as saying that he'd refuse to hand over data to assist Queensland in assessing landowners. So, in the end, the reforms weren't legislated. Queensland did have to make the decision to scrap it, and it repealed the legislation.

I do think that there's always the possibility they might have a go at making some changes to the land tax rules. And perhaps, you know, through some less controversial means, given the response to the recent proposal that ended up being scrapped, I think there'll be a lot more cautious in the near future. And you know, I don't want to give the government ideas, but Queensland is a bit of an outlier when it comes to land tax grouping rules. So perhaps one thing we might see in the future is a tightening up of these rules. So less controversial, but also effective in achieving the goal of increased revenue.

Rebecca Archer

And of course, housing affordability has been an issue for many years, and now with interest rates as high as they are and, you know, edging ever higher each month, there are many parts of the country experiencing a housing crisis. What measures are on the table in the coming year to take the pressure off owners and renters alike?

Kristina Popova

So, housing affordability – it’s certainly very much on State and Federal government agenda, and I wouldn't be surprised if we see more concessions and exemptions available in the build-to-rent sector. So, build-to-rent is a relatively new concept in Australia, but it's very popular, so particularly in the UK and the United States. So, it's different to the build to sell model where a developer develops and sells individual apartments, and those apartments are perhaps rented out to tenants.

So, under your typical build-to-rent model, all the properties are generally owned and managed by the one entity and then rented directly to the tenant, and already we have a number of Australian states – Victoria and New South Wales – there are limited concessions available both for stamp duty and land tax purposes. So, I do think we'll see more concessions and exemptions around the country, given the focus on housing and affordability and the rental crisis. Ultimately, you'd hope that those savings are passed on to the end consumer.

Rebecca Archer

And just lastly, Kristina, do you have any predictions for what else may eventuate, in terms of state taxes in the new year?

Kristina Popova

State taxes changes are almost impossible to predict, in some respects. So, they can be as you know, political drivers, the state of the economy will certainly have a role to play, but one thing that I think we might see is a broadening of the duty base in some states. And I say that because we've seen this happen quite consistently over the last few years, and what I mean by that is that more and more types of transactions are being subjected to duty. So, in recent times, we've seen that through the Economic Entitlement Provisions in Victoria, and that's essentially when you impose a duty on a party who might not be a landowner, and they receive income or profit from land. So, that's your typical development arrangement, where a developer receives proceeds of sale.

In New South Wales earlier this year, we had some really big changes that had the effect of duty now applying to changes of Beneficial Ownership of Dutiable Property, and also to Acknowledgments of Trust. So now things like grants of call options over land are subject to duty, which was already the case in a number of States but wasn't the case in New South Wales. So, all of these changes, they've had the result of more documents and transactions being subject to duty. So, in my view, very much long gone are the days where duty only applies to things such as land interests. And as we've discussed today, there are some States that are trying to move away from Duty on Residential Land, in some cases, and especially for first homebuyers. But in many ways, that's not the same in the commercial or business context.

So, I guess with that in mind, regardless, what we see in the new year, state taxes are constantly changing and transactions, you know, that might not have any duty consequences one year; they might have a different outcome in subsequent years. You know, we saw with Queensland, the position can literally change overnight or after a Cabinet meeting. So, it's really important that taxpayers and businesses paying really close attention to these changes, and consulting within Advisors as to how they can be impacted.

Rebecca Archer

Kristina, thank you so much for joining us today and for spending the time to sit down and unpack all of those changes in State Taxes. If people are wanting to get in touch with you who are listening and interested in hearing more or learning more about specifically what you do, and how you might be able to help them, how should they find you?

Kristina Popova

So probably the best way is through the Grant Thornton website – I’m not hard to find at all. Otherwise, I can be reached through LinkedIn.

Rebecca Archer

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