John Gorton thought he was on a winner. In 1970 he announced the abolition the accursed land rent, just before a Canberra by-election.
Under the then ACT leasehold system each leaseholder was required to pay 5 per cent of unimproved value of their lease every year in rent to the Government.
Imagine having to pay $3500 a year for the average block now in addition to having paid for the lease in the first place.
Gorton thought it was a silly system and the ACT should have, as close as possible a system like the rest of Australia. A 99-year lease with no land rent, he thought, would create that.
Gorton abolished land rent to the delight of Canberrans. Bear in mind that most of them had got their land for virtually nothing anyway. 99-year leases for residential land in Canberra were selling for a few hundred dollars. Some people had to pay the balance between their auction price and market value over 30 or more years at a ridiculously low interest rate.
But the game was up when Whitlam came to power and more and more public servants were transferred. The city grew. Land values spiralled. People are now paying the same as freehold in other capitals, or more.
Superficially, a sweeping move to freehold at no cost would be as attractive to the average householder as Gorton’s abolition of land rent. It appears that the Liberal Party both federally and locally have freehold on the agenda.
The Federal Party is likely to announce just before the election that if it gets government it will remove the two Federal impediments to freehold in the ACT: the Seat of Government Administration Act 1910 which prevents the Commonwealth from granting land tenure greater than a 99-year lease and the Federal ACT Self-Government Act which prevents the ACT from granting greater than a 99-year year lease.
The local party might join in. The Assembly, though, would have to approve the change. How would freehold affect Canberrans? There are two issues: security of tenure and planning for changes in land use.
Freehold would not greatly improve security of tenure for residential lessees. The ACT Lands Act already provides for automatic renewal on payment of a yet-to-be-determined small administrative fee. It may be that some ultra-cautious lending institutions might not like relying on that for, say, a loan over thirty years if the lease had say only 20 years to run. The first 99-year residential leases in Canberra have only about 30 years unexpired now, so it could be beaten up into an issue, especially in an election campaign.
Tenure is a different matter for commercial lessees. Generally commercial leases run for 50 years. The present law and practice is that renewal costs 10 per cent of value, which can be quite hefty. None the less, many have signed up in order to get the security of a longer unexpired term.
The Building Owners’ and Managers’ Association and the Liberal Party have argued that as commercial property is generally in line with freehold values, the renewal fee is equivalent to a tax on business, a disincentive to investment in Canberra and a haphazard way of levying money. BOMA has argued that there is no good reason to discriminate between commercial and residential lessees.
The former Planning Minister Bill Wood has argued that the community is entitled to a return from business when commercial leases are renewed. The second issue is planning control.
Under leasehold land-holders have a contract with the government to use the land only for certain purposes. If they want to change the purpose they have to change the contract. This gives the Government the chance to demand a fee for that change in the form of a betterment levy. This happens case by case as lessees seek to change their land use … for example from single residence to units; wholesale to retail; houses to offices.
Proponents of leasehold argue that this allows for fairly detailed planning and it enables the Government or community to recoup the increase in land value created by changes in land use. There have been arguments about how the extra fee should be calculated. Proponents of leasehold argue that as the community in general creates the infrastructure of the city that propels the changes in land use, the community should benefit to the tune of the full value of the change calculated as 100 per cent of the increase in value from the old use to the new use.
Against this, however, BOMA and others have argued that Canberra has run into a practical snag caused by the national and international investing climate. Very simply, since betterment has been put at 100 per cent, developers have not put up development proposals. They go elsewhere. No territory is an island. The result has been that the community has got nothing. Various parcels of land close to the centre of the city are being inefficiently used for low-density activity, BOMA argues. It has resulted in lower taxes and rates than if the development opportunities were encouraged.
Leasehold proponents say development profit should be made solely out of excellence in building and landscape, not in the land-value component, because that would be expropriating community assets.
The betterment argument does not arise under freehold. Freehold landholders can do what they like with their land, subject to zoning. Land can be re-zoned by the Government for planning reasons, but it is done for many land-holders at once. Those who want to redevelop to take advantage of the changed the use permitted under the new zoning can, but those who don’t want to change need not. As it is unfair to charge a betterment levy for those who do not want to change, the general principle is that upon rezoning, no-one gets charged. The windfall increase in value from the rezoning goes to individual landholders. The only increase in revenue comes with later increases in rates.
A whole string of economists and social theorists (such as Henry George) have argued that one of the great inequities of capitalism is that the increase in land value created by community effort goes to a few opportunistic developers. If this were levied by governments, there would be little need for other taxes. BOMA argues that the unearned increment can be captured by land tax.
Leasehold proponents argue that zoning power attracts property speculators to local government, who are there for the sole purpose of getting favourable zoning changes.
The practical problem is that commercial lessees now have uncertainty and costs over renewal; 100 per cent betterment and land tax. You can’t have it three ways. Something should give there in the face of shrinking Commonwealth funding and a requirement for the ACT to behave like other states. The ACT will have to attract business if children are not to be driven away and will not be able to on those terms.
If commercial renewal were free and automatic (like residential ones) and betterment reduced to, say, 80 per cent to give incentive to develop inefficiently used land, there would be less call for freehold with its attendant problems of less flexible zoning. And the leasehold system has to be more open, with all of the purpose changes and betterment charged publicly listed each quarter. The freehold-leasehold argument is perhaps less important than the openness of the process of changing land uses.
Giving residential lessees freehold is just a gimmick that comes with the attendant price of abandoning the detailed planning that is available when the Government can deal with one lessee at a time.