The ACT Minister for Housing and Suburban Development Yvette Berry MLA stated in response to a Question on Notice from Mark Parton MLA that: “The government has not considered abolishing land tax; land tax helps homebuyers compete with property investors and is an important source of revenue for the government”.
The Minister’s response contradicts the position previously adopted by the government. The
The government agreed in principle in 2012, to the abolition of land tax in its formal response to
Recommendation 18 of the Taxation Review. In so agreeing, the government noted the Review Panel’s observation that land tax in its [then] current form was unfair, as it discriminated on the basis of tenure. It further noted that the purported benefits of land tax in helping homebuyers were not certain, and increases in land tax may actually be counterproductive.
It is useful to distinguish the land tax imposed in the ACT and other jurisdictions from the ‘broad based land tax’ promulgated by the Henry Tax Review. The tax, as imposed in states and territories, has a narrow base, being levied on commercial and rental properties. In the ACT, commercial land tax has been phased out, and the tax has an even narrower base, compared to other states. The broad based land tax envisaged by the Henry Review is akin to general rates, which are equally levied on owner-occupied and rental properties.
The generally well-accepted principles of taxation, adopted by the ACT Taxation Review, are stability, efficiency, equity, and simplicity. So how does land tax fare against these principles? The ACT Taxation Review found land tax to be the most volatile of all the taxes; even more volatile than tax on conveyances, when measured through its sensitivity to economic growth, and its variance from long-run growth. For every 1 per cent increase in the economy, land tax was estimated to increases by 1.68 per cent, leading to increasing economic burden.
The review pointed out that to the extent that land tax affects the cost of consumption of housing, it is inequitable, being discriminatory on the basis of tenure. Compliance and administration costs were assessed to be the highest for land tax for each dollar of revenue raised. In short, the tax is least suitable as a stable revenue-raising instrument, is inequitable, and has relatively higher administration costs.
Over the three years between 2013-14 and 2016-17, land tax in the ACT increased at an annual rate of 10.3 per cent from $79 million to $106 million. In April this year, The Canberra Times reported that land tax would increase further by 45 per cent over the next five years. Indeed the 2018-19 budget provides for an increase of $11 million in the current year alone. The obvious question that arises in the context of these massive increases is, who will pay?
We note that Minister Berry, in her response mentioned above, is silent on whether the government
has undertaken or intends to undertake any analysis of the impact of land tax on housing affordability. Documents recently released by the government under the Freedom of Information Act do not indicate any work has been undertaken in this regard.
While the legal incidence of land tax is on landlords, its economic incidence depends on market
conditions. Landlords have an option of absorbing increases in the tax, or passing them to tenants
through rent. In general, landlords expect a return on their investment which is commensurate with or higher than alternative investment options. If the supply of rental accommodation is lower than
demand, or if the property prices (in other words, the investment required) are high, the landlords will pass the increase to tenants. Alternatively, if the returns are not enough and tenants unwilling to pay further, they could withdraw from the market and seek other investment options.
The Minister has indicated in her comments above, that the latter is the policy objective. Chief Minister Andrew Barr has reiterated that is the case by claiming that the changes would help
rebalance the housing market in favour of local buyers. However, as long as house prices continue to grow at the rate at which they have grown over the past five years, a direct result of the government’s land supply policies, the Canberra housing market will remain an attractive proposition for investors.
In that environment and outlook, landlords will be able to transfer the taxation costs to rents. Numerous reports, notable amongst those from Anglicare and the Women’s Centre for Health Matters, paint a bleak picture of the availability of affordable rental properties for households on single incomes or lone parents, particularly women.
Allowing homebuyers to compete with investors may sound a worthy objective. In reality, home
purchase is out of reach for the households which Anglicare’s and the Women’s Centre for Health
Matters’ studies are concerned about, again due to land supply policies, and a mistaken belief that the government has released “more land than needed”. The reality for those households is financial stress, and in a worst case, homelessness.
In summary, the ACT government’s taxation and land supply policies have worked together to create and exacerbate a rental affordability problem for the lower income quintiles – an inequitable tax is being made to work even harder.
The foreshadowed increases in land tax are accompanied by the introduction of a tax on vacant and
foreign investment properties, following a motion by Greens MLA Carolyn Le Couteur. It was reported that the government estimates 189 foreign investment properties will be impacted by the tax. The government has also identified 2500 vacant properties, based on “measuring those properties with unusually low power and water consumption” which are now to be charged land tax.
As an aside it is interesting that the government’s direct count of vacant homes in Canberra is well short of the 6300 vacant properties which were identified in a recent ANU study. There are likely to be exemptions from the new tax about which little information is available. The Chief Minister has, for example, advised the Assembly that the foreign investor surcharge will not be applied to Canberrans travelling overseas or overseas citizens living permanently in their own home in the ACT.
The likely increase in the taxation base is also not known. The process for determining the tax and its collection is likely to be highly intrusive, involving the issuance of a notice and will almost certainly require the development of an exemptions regime. A more fundamental problem with the decision to expand land tax to include vacant dwellings or unutilised assets, is to define its underlying principle. At a practical level, a question which arises is whether the Greens and Labor propose, just as land tax is currently payable if a household rents out a bedroom, that the proposed vacancy tax will be imposed on all vacant bedrooms in Canberra? That is, after all, a logical extension of their apparent thinking on the matter.
Ms Le Couteur is also reported to have said “a vacancy tax on vacant properties will go some way to
freeing up some properties in what is an increasingly tight housing market”. It is reasonable to ask how many of the 2689 properties will ultimately be subject to tax, and more importantly, how many will be added to the rental stock? The bigger question is: does the government know what it is doing?
Jon Stanhope is Professorial Fellow at the Institute of Governance and Policy Analysis (IGPA), University of Canberra. As Chief Minister, he had committed the ACT government to the Affordable Housing Action Plan, and review of its taxation system in the lead up to its taxation reform.
Khalid Ahmed was Executive Director, Policy Coordination and Development Division, ACT Treasury. He is currently Adjunct Professor at IGPA and works in the private sector.