Property Depreciation Schedules - The New reality

Stamp Duty or Land Tax?

Should stamp duty be abolished?

THE POTENTIAL abolition of stamp duty in Australia has been proposed and discussed for at least a decade, but recently there have been fresh calls from many corners to do away with the property tax.

Economists in particular – starting with Ken Henry way back when he authored and delivered his Henry Tax Review in 2009 – have been pushing for stamp duty to be abolished, arguing that now is an opportune time to make major structural tax reforms to support the economic recovery post COVID-19.

If abolished, the most common suggestion is that stamp duty would likely be replaced by a broad-based land tax on real estate owners to be paid annually and/or an increase in the GST, although the Federal Government has indicated it is opposed to the latter.

Why should stamp duty be abolished?

Inefficient, bad, lazy, archaic… these are just some of the words used to describe stamp duty. Dr Henry has called it a ‘diabolical tax’ and labelled it one of the worst taxes in Australia.

The fact is that stamp duty was established in the early 19th century, when documents for the transfer of a home needed to be officially stamped to make them legally binding, and governments took the opportunity to ensure people paid taxes at the time.

But while this worked in the olden days, it’s not relevant now with our systems far more sophisticated.

There has also been no indexing over time, despite prices rising significantly over recent decades, which has resulted in huge stamp duty hikes and of course government revenue.

How much does stamp duty raise?

Domain figures show stamp duty on a median-priced home in New South Wales grew by 102% between 2004 and 2019 to reach $42,269, 183% in Melbourne to hit $44,164, and 189% in Brisbane to reach $11,013.

Governments like stamp duty because it can provide strong revenue to state and territory budgets, but the downside is that this revenue can be volatile, reliant on a strong property market and consistent transaction levels. Stamp Duty

If transaction levels fall due to an economic downturn or a dive in confidence, so too does stamp duty revenue for governments, which can leave big holes in budgets from year to year.

For example, stamp duty revenue in NSW was $9.7 billion in 2016-17, but fell 24% in 2018-19 to $7.4 billion.

Could a broad-based land tax be an option?

In contrast, taxing land through a broad-based land tax, charged annually by sending a bill to everyone who owns land (a proportion if an apartment), would provide a much more consistent source of revenue over time.

Property Investment Professionals of Australia Chairman Peter Koulizos says an annual land tax would be better for state and territory governments by providing more regular income.

“The problem for state government is when the property market is booming so are their coffers – and generally revenue from property is the second highest income-earner after payroll tax – but in situations like COVID-19 revenues dive,

Getting a regular land tax from all property owners is going to be much better for them to budget.”

Peter Koulizos Chairman, Property Investment Professionals of Australia

The other major issue with stamp duty is that because it’s a massive impost on a single transaction – it could be $40,000 or $50,000 on top of a property purchase, particularly in Sydney, for example – it impacts economic decision making, often in a detrimental way, with people less inclined to buy or transact.

In particular, it can act as a barrier or deterrent to home buyers, particularly first homebuyers, who have to save both a deposit and then more for stamp duty, or add it to their mortgage, which will cost them more over time.

But it also leads to an inefficient use of housing as people become more reluctant or are unable to move – including to upsize or downsize – as they have to pay the huge cost of stamp duty each time, which makes it too expensive.

Land Tax Stamp Duty

This results in people living far from work opportunities or their children’s schools, or people living in homes far too big for them as they shy away from downsizing, which also prevents that larger housing being freed up for families that need it.

“Abolishing stamp duty might encourage more home ownership, which is a good thing,

When you have to come up with a 5% deposit plus 5% stamp duty, in theory it takes twice as long to come up with, so it’s a barrier to home ownership.

For prospective home owners it’s going to be a benefit because it’s less initial money that they have to come up with.”

Peter Koulizos Chairman, Property Investment Professionals of Australia

How would the abolition of stamp duty work?

New South Wales and Victoria are currently talking about doing away with stamp duty, while the Australian Capital Territory has been the only state or territory in Australia to actually do so, starting the process back in 2012.

The ACT is phasing stamp duty out under a 20-year plan, gradually reducing stamp duty rates and replacing it with higher annual rates or a land tax-style property rate.

While this can lead to a situation where people are paying both stamp duty on a purchase and an annual property tax over time (ie. being double taxed), thereby also ensuring the government’s revenue remains fairly stable, it’s not the only way to do it.

The other way is to abolish stamp duty straight away, and apply a land tax to purchases from a certain date, exempting people who already own a house and have paid stamp duty. This, however, could leave a hole in state or territory budgets for some time.

What are the potential disadvantages of abolishing stamp duty?

This issue of how stamp duty would be abolished and what is would be replaced with is the major potential downside, with the devil in the detail of how the plan would work.

One concern is that these annual land tax bills would have to be very sizeable to replace stamp duty, with one Deloitte Access Economics model estimating the average property would have to pay $2400 per year, but of course many properties valued at higher rates could pay up to five times as much.

And who would stop governments from upping these rates regularly, so that people end up paying much more over time?

According to the Property Council, the ACT’s approach was supposed to be revenue neutral for the government but in actual fact the revenues from property taxes are now higher.

A HIA report from the start of 2018 found the switch from stamp duty to land tax in the ACT has resulted in additional property taxes of $196.5 million, an increase of 38% over four years.

Koulizos hasn’t made up his mind about whether abolishing stamp duty is the right way to go, but isn’t a big fan of another annual financial impost on home buyers or owners, on top of council rates, insurances and water bills.

“I’m particularly concerned for people on fixed incomes or pensioners – once you get to 65 or 70 it’s another impost you have to keep paying until the day you die.”

Peter Koulizos Chairman, Property Investment Professionals of Australia

There are suggestions land tax bills for older people could be paid upon the sale of the property upon their death, but the bill of course still has to be paid.

So, will it happen?

While there is a lot of talk about the abolishment of stamp duty, whether or not it will actually happen remains to be seen.

Governments are very dependent on the huge revenue generated from stamp duty, so moving away from that will prove to be difficult.

Personally, I feel we should try our utmost to move away from this lazy tax that limits a workforce from moving to where the jobs are.

But it’s going to be very tricky politically to convince voters that replacing stamp duty with an annual charge on land is a good idea.

Let’s watch this space!

Why Buying Off-The-Plan Will Make You Money

Buying Off the Plan

Don’t Be Put Off Because You Can’t Explore The Property

There are many things you need to consider when buying an investment property in Australia. While the process may be exciting, it can also be confusing. 

One of the main choices you need to make relates to the type of property you buy. Do you purchase an older property that has a track record of generating income, or a brand new property that may stand a better chance of meeting the demands of tenants?

What if we told you there’s another way? Instead of buying a property that already exists, you can buy one that’s under construction. This idea may stray away from the property investment basics that you’ve read about while working out the complexities of investing in property for beginners. However, we can offer six reasons for why an off-the-plan property could prove to be a wise investment.

Reason #1 – Earn Early Capital Growth

What’s one of the first investment property tips for beginners that you’ve heard? It’s probably to buy low now so you can make a profit later. Buying an off-the-plan property allows you to do just that. So how does it work? It’s simple. You pay a deposit to the developer, and this secures your ownership of the property.

However, the construction settlement date may be several years in the future. As a result, you can earn capital growth for the home, even during the period prior to construction. You won’t even have paid the full price of the property before it starts making money for you. Depreciation Calculator

Reason #2 – Stamp Duty Savings

Buying an investment property in Australia comes with a lot of added fees. The largest of these is often stamp duty. In most states, you will have to pay thousands of dollars in stamp duty before you can take ownership of the property. Take Victoria as an example. For a property worth $500,000, you’ll have to pay almost $20,000 in stamp duty.

Buying off-the-plan can help to avoid this major fee. Most states don’t charge stamp duty on properties that don’t exist yet, which means you make thousands of dollars in savings from the beginning.

Reason #3 – Extra Saving Time

You only have to put down an initial deposit when you buy an off-the-plan property. As we mentioned before, you may have to wait for a couple of years before construction finishes.

This gives you plenty of time to save some money. Once construction ends, you could have thousands of dollars that you wouldn’t have had if you’d bought an existing house. You can then put this money toward your home loan, reducing the principal so that you pay less interest on the loan over time.

Reason #4 – You Can Claim Depreciation

Depreciation Quote ScheduleYou may be planning on renting out your off-the-plan property when construction ends. If so, you may be able to claim thousands of dollars in tax deductions in Australia on the property.

Make time to create a depreciation schedule with the help of a quantity surveyor. This will highlight all the things that you can claim as depreciation upon completion of the property. This may include the new furniture and fixtures that you add to the property before making it available to tenants. The higher the depreciation, the lower your holding costs.

Reason #5 – You Can Pick the Perfect Plot

Showing early interest in a new development comes with its own advantages. In addition to benefitting from the lower prices that developers often charge to their early investors, you also get to choose from the best plots of land.

This will benefit you monetarily when construction ends. Getting in early means you can pick the property that will have the best views or offers the amenities that your tenants will want. As a result, you can charge higher rents, so your property generates more income.

Reason #6 – Reductions in Other Costs

A brand new property does not come with the maintenance needs of an old property. That should go without saying. You won’t have to earmark thousands of dollars for repairs, as the property should be good to go from the moment construction ends.

However, did you know that off-the-plan properties could save you money in other areas? It’s all thanks to recent changes in the Australian Building Code. New properties must now meet several energy efficiency criteria. This means the cost of utilities falls, which benefits both you and your tenants.

The Final Word

Buying off-the-plan may seem scary at first. After all, you don’t have the opportunity to explore the property before you buy it.

However, it opens the door to savings that you wouldn’t have access to with an existing property. To find out more about buying an off-the-plan investment property in Australia, contact Washington Brown today.