Changing the mix: transfer duty 1 Reasons to reform

As argued in Section 5.2.2, gradually shifting the mix in the transfer duty system so that investors pay proportionally more and owner-occupiers pay proportionally less is likely to support the housing tax policy goals outlined in Chapter 1 over the longer-term. This argument is based on certain assumptions.

 Reductions in duty for lower-value properties purchased as principal places of residence are unlikely to be capitalised into higher prices because, in most sub-markets, increased

demand from owner-occupier purchasers will be offset by reduced demand from investors— this is not the case with first home buyers’ grants, which tend to increase net demand in key markets leading to rising price increases (Wood, Ong et al. 2010; Eslake 2013).

 The proposed policy changes will not have a significant impact on rental affordability. While the supply of rental stock may decline, this will be offset by falling demand for rental housing as home ownership rates increase. As Eslake (2013) argues in relation to negative gearing, if a rental property is sold into owner-occupation, there is no net impact on housing supply, just a change in use.

 At the margin, increasing the transaction cost of buying and selling investment properties will encourage investors to hold properties for longer periods of time, which will increase security for tenants. We also note that type of ownership (private vs institutional landlord) may have a

In addition to housing affordability and sustainability outcomes, there are other advantages to reforming rather than replacing transfer duty. The parameters of such a system can be easily set to promote progressivity based on property value. States would not, in the short-term at least, have to confront the political challenge of extending the land tax base to the family home (Johnston 2016). As noted in Chapter 2, elements of the layered model advocated in this report are already being adopted in some jurisdictions—for example, New South Wales and Victoria are already providing transfer concessions to owner-occupiers purchasing lower value properties, and to first home buyers in particular. A simplified transfer duty regime also

maintains a coherent base upon which an incremental transition to a land tax can be introduced, should state governments wish to do this at a later date.

The two options for incrementally shifting the transfer duty burden from owner-occupied property to investment properties analysed in this section are:

 Option no. 1: Adaptation of the simplified transfer duty regime outlined in Chapter 5 by removing the duty-free threshold for investment properties, with the revenue gained used to fund an increase in the duty-free threshold for purchasers who are intending owner-

occupiers.

 Option no. 2: Retaining the same threshold for all purchasers, but introducing a different transfer duty rate depending on the use of the property, so that investors pay a rate that is one percentage point higher (although the rate differential could vary) than that paid by owner-occupiers. The rates would be calibrated so as to raise the same amount of revenue as the baseline model.

6.1.2 Modelling changes to the transfer duty mix

Option no. 1: Remove the duty-free threshold for investment properties

With a duty charged using a flat rate of 6 per cent, the modelling suggests (see Table 15 below) an additional $5.4 billion in transfer duty revenue would be raised across Australia if the duty- free threshold outlined in Chapter 5 was abolished for investment properties. This additional revenue would be used to fund an increase in the duty-free threshold for owner-occupiers, meaning that they would be paying proportionally less than residential property investors.

Table 15: Thresholds and ‘break-even’ points under Reform Option no. 1, compared to baseline reform State Median ($) Baseline reforma (6% rate) Reform option 1

(6% rate, investor threshold of zero, revenue diverted to increase owner-occupier

threshold) Threshold ($) Break- even value ($)b Revenue ($m) PPR threshold ($) PPR break- even value ($) PPR paying less (%) NSW 653,697 245,529 682,500 2,245 313,000 950,000 66 VIC 524,872 110,905 303,000 815 113,000 0–304,500 550,000- 1,300,00c N/A QLD 424,966 220,983 468,000 1,501 313,000 786,000 85 WA 481,605 213,351 546,000 488 288,000 986,000 88 SA 381,059 127,274 397,500 267 163,000 717,000 85 TAS 283,886 143,078 327,000 94 188,000 473,000 81

Source: Authors’ own calculations based on CoreLogic data

a As outlined in Chapter 5.

b As in Chapter 5, the ‘break-even’ value refers to the property price below which the purchaser would be paying less under the new regime compared to the old.

c As illustrated in Figure 12, the Victorian case is complex due to the interaction of PPR concessions. The majority of home buyers will be better off although a set of buyers between $304,500 and $550,000 would be slightly worse off. This model would have to be adapted for the Victorian case. (See existing schedule in Table 6.)

Again, as with the modelling results in Chapter 5, the Victorian case is a partial exception to the overall pattern because the Victorian transfer duty schedule approximates the reform scenario being modelled here. For the other states, however, the general effect is to substantially increase the threshold and the ‘break-even’ point for owner-occupiers and overall progressivity, as can be seen in Figure 13 below.

Figure 13: Transfer duty paid by owner-occupiers: baseline reform (with 6% rate) and Reform Option 1, each compared to current schedule

Source: Authors’ own calculations based on CoreLogic data.

Reform option 2: Impose a transfer duty surcharge on investment properties

An alternative approach to creating differential treatment of investors and owner-occupiers is to retain thresholds for both categories of purchaser but introduce what is effectively a transfer duty surcharge on investors relative to owner-occupiers. This would have two distributional implications:

1 Relative to Reform Option 1, the incidence of higher transfer duty charges will fall on higher