When the then Queensland Premier Joh Bjelke-Petersen abolished death duties in the 1970s all other jurisdictions followed.
Ever since, they have had to find ways of replacing death duties. Invariably, the replacements have been of a similar ilk – imposts when large assets are transferred. The Feds call it capital gains tax and the state call it stamp duty.
This week NSW imposed a new one: a stamp duty on the sale (as distinct from purchase) of investment property. It also widened its grab of land tax, though it has still not caught up with the ACT’s land tax which is the highest in Australia for the bulk of properties.
The NSW move seems like the response to an engineered crisis following the Commonwealth Grants Commission’s carve up of the GST revenue in a way unfavourable to NSW.
The new NSW taxes both affect Federal revenue. They are directed (with minor exceptions) to people who rent property. These people can claim the new NSW taxes against their Federal income tax. Most of these people are on the top marginal rate, so half of the NSW revenue will come indirectly out of Federal tax coffers.
The new taxes were announced quite quickly. The announcement of the new stamp duty lacked some critical detail. The 2.25 per cent tax will phase in when a property is sold for more than 12 per cent above the price for which it was originally bought. After 15 per cent the full 2.25 per cent will apply. And the 2.25 per cent applies to the full purchase price, not just to the profit once one sells for a profit of more than 15 per cent.
One could easily forgive an interpretation that it would apply to just the profit, but it does not appear so from the mini-Budget papers. There is no indication whether there will be some form of indexation. There is no detail on how the new duty will affect GST on commercial property. There is no detail on how it will apply to deceased estates. If you inherit your parents house, how long before it becomes subject to land tax and the new stamp duty on sale?
The lack of detail indicates a hurried job.
But perhaps NSW Treasurer Michael Egan – the man who thought he would slit his wrists at the outcome of the Grants Commission carve up – thought his new tax would put a stop to the property boom as well as restore NSW’s “fair share” of the Federal GST distribution via the back door. The boom, however, has many causes and one tax hit will not stop it. The boom is fuelled by land scarcity in major cities and the fact Australia imports 120,000 people a year most of whom want to live in those cities. Easy credit is also fuelling the boom. There is little sign of much change in these things.
The more likely explanation of the new NSW taxes is that they ares a direct retaliation for the Grants Commission’s work. The new stamp duty will raise $690m – slightly less than half of that will come indirectly from Federal coffers via property owners’ tax deductions. That is about $345 million – suspiciously close to the $376 lost to NSW under the 2004-2005 Grants Commission formula for GST grants.
The new land-tax arrangements (again deductible against Federal income tax for most) will offset much of the $273 million cost of abolishing stamp duty for first-home buyers.
The ease with which NSW undermined the Grants Commission and the GST carve up shows that the whole GST package is unravelling – particularly as the original GST package was designed to replace inefficient taxes like stamp duties with the broader-based efficient GST. Stamp duties are a burden on people moving to more suitable housing. The land tax might be passed on in the form of higher rents, but the politicians do not care because landlords take the flak, not them.
The other leg of the GST was a commensurate decrease in income tax. It simply has not happened. All of the income-tax cuts provided at the time of the introduction of the GST have been eroded by inflation. The 15 per cent inflation since then has pushed large portions of people’s income into higher tax brackets so we are being taxed at the same or higher levels than before the GST, yet the GST remains.
It might be fine if all the extra tax went on better government services, but everywhere we turn it is not so. In NSW, people are dying of negligence in Government hospitals as the Bret Walker inquiry reveals. The public transport system is a shemozzle. In Victoria, the police watch helplessly as gang warfare breaks lose and ordinary motorists cop ever increasing tolls. In the ACT, child welfare services cannot obey the simple law about reporting suspected child abuse and mental health services cannot cope as the mentally ill take their own lives. In Tasmania, the government is turning a blind eye to forestry malpractice and the consequent destruction of the tourism industry.
In short, Australia’s tax system needs an overhaul: an end to silly cost and revenue shifting between the Feds and the states; an end to bracket creep; an end to inefficient taxes.
It might even mean going the full circle and reimposing death duties to replace what amounts to the present covert death duties – duty when property changes hands.
At least state death duties would not be deductible against Federal income tax. And they are fairly efficient because they do not burden economic activity. In fact, if one state reimposed death duties and it caused an exodus of the elderly trying to “avoid” the tax, so what? The elderly are big users of state services.
One day one state or territory will wake up to this and see that the abolition of death duties was one of the silliest events in the history of state financing. The ease with which NSW imposed a new tax this week shows that it would not be difficult to reimpose them. Why not combine life’s two inevitable events?