Scrapping stamp duty would largely benefit homebuyers and increase buying and selling activity, according to a new report.
The National Housing Finance and Investment Corporation (NHFIC) report on stamp duty reform found the tax imposed a high cost on households, and was a barrier for many people looking to upsize or downsize.
It noted a household that bought the Sydney median priced house four times over the past 20 years would have paid more than 10 times the amount of stamp duty than a household making only one purchase at the start of this period.
The report comes as reform gathers momentum, with the New South Wales Government (NSW) looking to replace stamp duty with a smaller land tax, joining the ACT which is in the process of doing the same.
In NSW, the current proposal would not affect existing property owners, so they wouldn't effectively be taxed twice.
Off the back of surging house prices, NSW stamp duty revenue hit $9.379 billion for the 2020-21 financial year, a sharp increase on 2019-20’s $6.95 billion and $7.4 billion in 2018-19.
NHFIC's report stated scrapping stamp duty would see an increase in values at first, but this could be accounted for by lenders when evaluating potential borrowers.
"Removing transfer duty in favour of a broad-based land tax will likely lift dwelling prices in the short-term as the removal of transfer duty is capitalised into prices," it said.
"However, if lenders fully capitalise the cost of the replacement land tax into loan serviceability criteria, the price impact from removing duty may be negligible.
"Data shows dwelling prices and the number of transfers both rose in the ACT during the transition period."
The report found Victoria, which has the highest rate of transfer duty in the nation, had the most to gain from moving to a land tax.
Australian jurisdictions were 40% more sensitive to duties than many developed European countries, but the reforms would provide 'substantial' benefits including more efficient use of housing stock and improved labour productivity.
Transferring away from transfer duty
With stamp duty such a massive revenue raiser for state and territory governments, the report noted there were a range of options available for a smooth reform.
A short phase-out period, over five years instead of 20 for example, could help limit the impact of house price growth on the cost of transition.
Crediting back households which recently paid duty wouldn't result in a cut to land tax revenue, and asset rich and cash poor retirees could defer some or all of their land tax liability until their property was sold.
The report noted the cost to landlords of a new land tax was 'unlikely' to be passed on to tenants, but it may be legislated to make this unlawful.
"Property investors typically have a relative short property ownership period compared to owner-occupiers and the additional turnover generated by the removal of transfer duty may disrupt rental agreements and tenure for tenants if some protection is not put in place," it said.
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