Why NSW Should Replace Stamp Duty with a Broad-Based Land Tax

 

Stamp duty, officially called transfer duty in New South Wales, is charged when property changes hands. That makes it more than a tax on property. In practice, it is a tax on moving.

My proposal is straightforward. NSW should progressively replace stamp duty with a broad-based annual tax based on land value. The reform should be revenue neutral, so the objective is not to raise more tax overall. It is to raise the revenue government needs in a way that creates fewer distortions in the housing market.

The difficult part is the transition. Recent buyers should not feel they are being taxed twice, and homeowners with valuable properties but limited incomes should not be forced to sell simply to meet an annual tax bill. Both problems can be addressed.

Stamp duty is really a tax on changing homes

For decades, governments have searched for ways to improve housing affordability. They have introduced grants, concessions, subsidies and special schemes, all with varying levels of success. Yet one of the biggest obstacles to a more efficient housing market remains largely untouched: stamp duty.

Unlike a recurring tax on land, stamp duty is triggered by a transaction. People pay it precisely when they decide to change homes. That means it discourages decisions that would otherwise make sense for individuals, families and the wider economy.

Consider a retired couple living in a large family home. Their children have moved out and the house is bigger than they need. In many cases they might happily downsize. The problem is that buying the replacement property can trigger a very substantial stamp duty bill. Faced with that cost, many simply stay where they are.

The same applies to growing families who need an extra bedroom, workers considering a move closer to employment, and older Australians wanting a home that is easier to manage. Stamp duty discourages mobility and can leave people in housing that no longer suits their needs.

Housing affordability is also about using the homes we already have

Most housing affordability debates understandably concentrate on building more homes. Supply is critical. But there is another part of the equation that receives less attention: how efficiently are we using the housing stock that already exists?

If an older couple would prefer a smaller home while a growing family needs a larger one, a move can improve the circumstances of both households without constructing a single additional dwelling. The market helps match homes with the people who need them. A large transaction tax interferes with that process.

This does not mean people should be encouraged or pressured to leave homes they love. There are emotional, family and community reasons for staying put. The point is simply that tax policy should not create an additional financial barrier when people already want to move.

The alternative: a broad-based land tax

A better approach is to replace stamp duty progressively with a broad-based annual tax on land value. Instead of imposing a large bill on the relatively small number of people who buy property in a particular year, the burden is spread more broadly across property owners.

Importantly, an annual land-based tax does not create the same penalty for moving. A household can decide whether to upsize, downsize or relocate based more on its actual needs and less on the tax cost of the transaction.

No tax is painless. A land tax would still have to be paid. The argument is not that one tax disappears and nobody pays anything. It is that, if government needs to raise a given amount of revenue, it should favour taxes that interfere less with sensible economic and housing decisions.

Revenue neutral, not a new tax grab

This is the objection I hear most often. If government introduces a broader land tax, people understandably worry that it will simply become another tax on top of everything else.

That is not the reform I am proposing.

The objective should be explicit revenue neutrality. As revenue from the new land-based tax rises, revenue from stamp duty should fall. The overall purpose is to collect broadly the same amount of revenue in a more stable and efficient way, not to give government an excuse to collect more.

Stamp duty revenue also varies with the level and value of property transactions. In a strong market governments can receive a windfall. When transactions fall, receipts can fall sharply. A broad annual property tax provides a more predictable revenue base for services such as hospitals, schools and infrastructure.

The ACT shows that a transition can be attempted

Australia does not have to discuss this entirely in theory. The Australian Capital Territory began a long-term tax reform program in 2012-13 that progressively reduced conveyance duty while increasing general rates and changing other property taxes.

ACT Treasury’s published analysis found the reform was broadly revenue neutral over its first seven years. The ACT is not NSW, and Canberra’s scale and government structure are different. We should therefore be cautious about simply copying its settings. But it demonstrates an important principle: a government can deliberately reduce its reliance on transaction taxes while shifting revenue toward recurrent property charges.

NSW has also previously examined replacing transfer duty with an annual property tax. The policy problem is therefore not new. The real question is how to design a transition that is fair enough to be politically and practically achievable.

Slow transition or faster reform?

Had NSW begun this process 15 or 20 years ago, the transition could have been gradual and much of it might already be behind us. Unfortunately, delay makes reform harder, not easier.

There are two broad approaches. One is a very slow transition, reducing stamp duty over many years while gradually increasing the annual land-based charge. That minimises disruption but postpones much of the benefit.

The other is a faster transition. That removes the transaction barrier sooner, but it creates two legitimate fairness problems that must be solved: what happens to homeowners who are asset-rich but income-poor, and what happens to people who have only recently paid a large stamp duty bill?

Protecting asset-rich, income-poor homeowners

Many retirees are the obvious example. They may own a valuable home purchased decades ago but live on a relatively modest income. It would be unreasonable for tax reform to create a cash-flow problem so serious that they felt forced to sell.

A practical answer is deferral. The concept is similar in principle to HECS-HELP, although the mechanics would be different. Eligible homeowners could defer some or all of the annual liability. The deferred amount would become a secured charge against the property and be repaid when the property is eventually sold or transferred.

Those who can comfortably pay annually could do so. Those who cannot would not have to leave their home merely because the tax system changed. The important principle is that a tax based on a valuable asset does not always have to be collected immediately from current income.

Protecting people who have recently paid stamp duty

The second problem is equally real. Imagine buying a home shortly before reform and paying a very substantial amount of stamp duty, only to be told that you must now begin paying the full new annual property tax as well. It would understandably feel like paying twice.

A transitional credit could solve much of this. The more recently an owner paid stamp duty, the larger the temporary credit or reduction could be. The credit would then diminish over an agreed period until the property moved onto the full annual system.

Another variation would be a stepped transition based on how long the property has been owned. Either approach introduces some temporary complexity, but temporary complexity is preferable to permanent unfairness.

Over time, the transitional arrangements would wash out and all properties would ultimately be treated under the same broad-based system.

What would the reform achieve?

Replacing stamp duty would not solve Australia’s housing problems by itself. Planning, infrastructure, construction costs, population, finance and housing supply all matter.

But it would remove a tax penalty from one of the most ordinary things households do: changing homes as their lives change. It could make downsizing easier, reduce the cost of upsizing, improve labour mobility and help the existing housing stock be used more efficiently.

It would also replace a volatile transaction-based source of state revenue with a broader and potentially more predictable base.

The real question is how we raise the revenue

Every tax affects behaviour. The sensible objective is not to pretend governments can operate without revenue. It is to ask whether we are raising that revenue in the least damaging and fairest way available.

Stamp duty raises money, but it does so by taxing movement. It penalises households at the exact moment they are trying to adapt their housing to a change in family, work, age or lifestyle.

A broad-based land tax is not perfect. There would be winners, losers and difficult transitional decisions. But those difficulties can be managed. The present system’s distortions are permanent for as long as we choose to retain it.

If NSW is serious about housing affordability and making better use of the homes we already have, replacing stamp duty deserves to be more than an occasional policy discussion. We know the broad direction of reform. What is needed is a fair transition, a genuine commitment to revenue neutrality and the political will to begin.

Frequently asked questions

What is stamp duty in NSW?

Stamp duty is commonly used to describe NSW transfer duty, a state tax generally payable when property is purchased or transferred. The amount depends on the property’s dutiable value and the applicable rates and concessions.

Why can stamp duty discourage downsizing?

A homeowner who sells one property and buys another may face a large transfer duty bill on the replacement home. That extra transaction cost can make a move financially unattractive even when the new home would better suit the household.

Would replacing stamp duty with land tax mean homeowners pay more tax overall?

Not under the proposal in this article. The reform should be designed to be revenue neutral, with increasing revenue from the annual land-based tax matched by declining reliance on stamp duty.

What happens to retirees who own valuable homes but have limited income?

A deferral system could allow eligible owners to postpone some or all of the annual liability, with the deferred amount secured against the property and paid when it is sold or transferred.

What about someone who has just paid stamp duty?

Recent purchasers should receive a transitional credit or reduced annual liability so they are not effectively asked to pay both systems in full. The concession could reduce progressively over time.

Has Australia tried this approach before?

The ACT began a long-term tax reform program in 2012-13 that progressively reduced conveyance duty while increasing recurrent property charges. NSW has also previously examined a transition from transfer duty to annual property tax.