The Minister for Revenue Senator Helen Coonan was in strife this week over property taxes.
Her strife highlights the illogical, haphazard tax base in Australia.
Coonan shares a house in Woollhara with her husband of 20 years, former NSW Supreme Court judge Andrew Rogers. Rogers had been married before and had property from that earlier married, including a house on the northern beaches which has been held in the name of a family trust/company and later in his name.
Opposition questions in Parliament suggested that Rogers decided to call the beach house his principal residence to avoid land tax. Whether that is true we don’t know, but it is easy to see that the NSW land tax system would encourage one to have a property as a principal residence rather than an investment property or a second house.
Before 1980, it was a fairly straightforward matter to hold a few investment houses in the name of a family trust and split the income to reduce income tax. Student children could collect a modest income that would otherwise go to the highly taxed head of the household. The student children, on the other hand, would not cop much tax. First, the Fraser Government did a little bit to ensure “unearned’’ children’s income paid full tax. Then Keating introduced capital gains tax. Meanwhile, the states – starved since 1944 from the endlessly increasing stream of income tax – looked to property. They introduced land tax and allowed what was once a modest stamp duty to grow with inflation and rising land values to be a voracious contributor to the public purse.
The combination of these taxes has dogged those who want through legal means to reduce their tax liability. They were caught at every turn with one exception — the great sacred cow of Australian taxation, the family home, or in tax parlance, the principal place of residence. It is an apt phrase. In theory, you can only have one “principal place of residence’’, all other properties you own, of their nature, are not principal places of residence.
At first blush land tax seems fine. People who earn an income from the property should pay tax. But it is nearly all passed on – both as a tax deduction against other income, so the Feds wear it, and in the form of charging higher rents. In short, the poor end of town, those who need the feds to give them welfare, and struggling tenants pay the land tax while the middle class burghers in their own “principal places of residence’’ escape. Forget all the waffle about affordable housing. Land tax is a tax on affordable housing. Tax is not all what it seems.
It would be better to tax, not according to the land value, but the income generated from it. But once you start that game why not have special taxes for other forms of income generation — a fishing-boat tax, a plumbers’ tools tax and so on.
NSW has a tax-free threshold of $220,000 of the unimproved value of the land for all land, and exempts the principal residence unless its land value is greater than $1.4 million. Beyond those thresholds the tax is a flat 1.7 per cent.
Whatever the details of the Rogers-Coonan arrangement, the incentive for saying a dwelling is a principal residence instead of an investment property is huge. A property valued at $1.4 million attracts no tax as a principal residence. As a second residence it attracts an annual tax of about $20,000. Should a husband and wife each be allowed to have a principal residence? Why leave untaxed someone with a single $1.39 million home yet tax highly someone who has a $400,000 unit in town and a $400,000 holiday house with less total property value?
The NSW tax is pernicious. In 30 or 40 years the tax grab is greater than the total value of the land. It applies irrespective of the income of the owner or of the amount of rent being brought in.
Those people who attempted to avoid federal income tax by putting their investment properties in the name of a company or trust then got hit by state land tax if they left it in the company or trust name. And if they tried to take it out of the trust or company name and into the name of a family member as a “principal residence’’ to avoid future capital gains tax and land tax, they got hit by high state stamp duties and an immediate federal capital gains tax.
Human nature being what it is, people will seek (perfectly legally) to avoid big taxes that are imposed on narrow bands of transactions. And the narrower the transaction the easier it is to avoid. The flatter and smaller the taxes, the less incentive there is to avoid and the less distorting they are.
It sounds terrific and politically acceptable to tax the rich owners of property. But narrow taxes like that can be avoided or passed on to the less well-off. Much better to impose a higher difficult-to-avoid GST which taxes consumption and the more you consume the more tax you pay. The GST might seem inequitable but we would have been better off with a higher and broader GST and no haphazard state land taxes – but that would seem at a political level to be imposing an unfair burden on the poor when the opposite is true. It would impose a fair burden on the high-spending well-off. And why not impose capital gains taxes on principal residences? It would dampen the huge misallocation of resources through “investment” in extending and renovation the tax-free family home.
Perhaps the Minister for Revenue should look at some of these issues more closely.