Should We Ditch Stamp Duty For Land Tax?

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Nerida Conisbee,
Ray White Chief Economist

The transition from stamp duty to land tax represents one of the most significant potential reforms in Australian property policy. While the economic benefits are clear, most state governments remain hesitant to implement such a major change. New Zealand made an immediate transition in 1999, while the ACT opted for a gradual 20-year implementation. Their contrasting approaches offer valuable insights.

Stamp duty presents a significant barrier to residential mobility. Effectively, you’re looking at tens of thousands of dollars just in tax every time you move. The impact is that people stay put in homes that don’t suit them anymore. Older people stick around in large homes while young families squeeze into tiny apartments because the cost of moving is just too high.

When this significant upfront cost is removed, the property market functions more efficiently. Decisions become based on actual housing needs rather than tax implications. The effect is similar to improving traffic flow on a congested road – movement becomes more fluid and practical.

State treasury departments currently face significant challenges in budget planning due to stamp duty’s unpredictable nature. A land tax would provide more consistent income, allowing for more reliable planning and resource allocation.

A land tax system promotes more efficient use of existing housing stock by encouraging property owners to maximise the utility of their assets. For example, keeping a home vacant, without a tenant, becomes more costly. This can lead to reduced vacancy rates as the ongoing cost of holding underutilised property increases.

Land tax can significantly influence urban development patterns by reducing land speculation and hoarding because of the higher holding costs. This encouragement of urban infill development leads to more efficient use of existing infrastructure and promotes better-planned urban development.

Shifting to a land tax system requires setting up an entirely new administrative framework. This means creating a system to regularly value all properties, developing processes to collect annual payments rather than one-off stamp duty, and establishing ways to help property owners experiencing financial hardship. Each of these elements takes time to set up and comes with significant costs.

This reform raises particular concerns for retirees living in homes they bought decades ago in what are now expensive suburbs. Despite substantial property assets, many lack the cash flow to manage an annual land tax, potentially forcing them to leave long-established communities. However, this goes back to one of the advantages that it does encourage people to move out of larger homes that may no longer suit them.

Regional variations create significant challenges for implementing a uniform land tax system. A $2 million Sydney property might be equivalent to a $500,000 regional property, making uniform tax rates problematic. Regional areas also face distinct challenges – farmers might own valuable land but have limited cash flow, while mining towns experience dramatic value swings. These variations mean any land tax system needs carefully designed rates and provisions to work fairly across all markets.

Perhaps the most significant challenge is explaining such a complex change to the community. While stamp duty is well understood, land tax represents a fundamental shift in property taxation that requires careful explanation. Getting this message right is crucial to avoid community resistance.

The switch to land tax appears, at first glance, to improve housing affordability. Rather than saving for both a deposit and stamp duty, home buyers would only need to save for the deposit, significantly reducing their initial costs. For example, on a $1 million property, this could mean needing $50,000 less in savings upfront. This reduced barrier to entry should, in theory, help more people enter the property market sooner.

However, the reality in supply-constrained markets may be quite different. Buyers typically stretch their budgets to the maximum amount they can borrow. When stamp duty is removed, this financial capacity doesn’t disappear – buyers often simply add what they would have paid in stamp duty to their maximum offer price instead. We’ve already seen this effect with first home buyer stamp duty concessions, where much of the savings ended up being absorbed into higher property prices rather than improving affordability.

The impact on property market dynamics remains unclear. While reduced transaction costs should increase market liquidity, this could lead to both positive and negative outcomes. More frequent trading might improve market efficiency, but it could also increase price volatility and speculation.

New Zealand’s experience during the pandemic provides a stark example of these risks. Without stamp duty acting as a brake on speculation, investors were able to quickly buy and sell properties as prices rose. This contributed to a dramatic price surge during 2020-21, followed by significant price falls when market conditions changed. The absence of stamp duty’s high transaction costs meant there was less friction in the market to moderate these price swings.

While land tax provides more stable revenue than stamp duty, the long-term revenue implications are difficult to predict. Changes in property values, market activity, and economic conditions could all affect the revenue base differently than under the current system.

The extent to which reduced transaction costs will actually encourage workforce mobility remains uncertain. While stamp duty is one barrier to relocation, other factors such as family connections, schooling, and community ties also significantly influence moving decisions.

New Zealand and the Australian Capital Territory (ACT) abolished the tax in very different ways. New Zealand opted for an immediate transition in 1999, completely eliminating stamp duty and introducing the new system in one swift move. This “cold turkey” approach aligned with New Zealand’s broader economic reform agenda of the late 1990s, when the public was more receptive to significant policy changes.

By contrast, the ACT chose a gradual 20-year transition period, running dual systems simultaneously while slowly phasing out stamp duty and phasing in land tax. This measured approach reduced market shock and allowed property owners to adjust their financial strategies over time, while also preventing perceived unfairness for recent stamp duty payers. However, it comes with its own challenges, including the complexity and cost of maintaining two parallel systems and delayed realisation of the full benefits of reform.

The outcomes of these different approaches reveal distinct trade-offs in terms of market stability and administrative efficiency. New Zealand’s immediate transition required intense but short-term administrative adaptation, while potentially contributing to higher market volatility. The ACT’s gradual approach appears to maintain more stable market conditions but faces longer-term administrative challenges and the risk of policy reversal during the extended transition period.

Both jurisdictions had to invest significantly in public communication and new administrative systems, though their timing and intensity differed markedly. New Zealand needed strong initial public buy-in for their immediate change, while the ACT’s approach allowed for ongoing adjustment of public expectations and system refinement based on early results. The experiences of both regions suggest that successful implementation depends less on the speed of transition and more on the clarity of communication and the strength of administrative systems supporting the change.

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Media contact
Nerida Conisbee
Ray White Group
Chief economist
nconisbee@raywhite.com
0439 395 102

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