Property: killing the golden goose

There’s a problem looming for all Australian governments if they don’t take tax reform seriously and broaden the tax base.

While everyone has been enjoying the property boom in Australia over the past couple of years, except for first-home buyers, the biggest beneficiary has been the taxman According to the latest analysis of taxation revenue from the Australian Bureau of Statistics taxes based on property - on sales or values - topped $40 billion for the first time in 2013-14.

Writing in the Australian Financial Review, an old contemporary of mine Robert Harley has calculated the property tax grab, at Commonwealth, state and local government level, while still a relatively small proportion of the total tax take at around 9 per cent, is rising fast.

In 2013-14, the figure jumped 13 per cent, well ahead of the growth of income taxes, or the GST or taxation in general, which rose 5 percent.

That’s he good news and is not surprising given the strength in the housing and commercial property markets.

But what if something goes wrong in the property market, which is renowned for boom/bust swings over the past couple of decades. This would not only be bad for property owners, both residential and commercial, but also would put both federal and state governments in a revenue bind.

Governments have become too reliant on property revenue. In Victoria in 2014-15, property taxes, including $1.79 billion in land tax and $4.88 billion in stamp duty accounted for 41 per cent of the states total tax revenue. The risk is that governments will continue to slog real estate and treat is as a cash cow to make up for shortfall in other areas.

Harley points out that the Barnett Government did just that with land tax in the latest West Australian budget.

The lion’s share of the tax burden is increasingly falling on the property industry, which is already one of the most heavily taxed sectors of the economy.

Harley quotes the chief executive of the Property Council, Ken Morrison saying “The tax reform discussion paper showed that property contributes 9 per cent of Australia’s total tax take compared to an OECD average of just 5 per cent.”

Morrison has noted the recent trend to boost the taxation of property. “We’ve seen surprise big new hikes on foreign investment from Canberra and Victoria and another round of land tax increases in Western Australia,” he says

“Governments risk undermining both the economy and their own revenue streams if they discourage investment and activity.”

This overall theme is more worrying if a property downturn corresponded with continuing weakness in the commodity cycle. Or for that matter the Reserve Bank was forced to start lifting rates in line with US tightening.

Just as most of the representative business bodies having been advising governments for that past couple of years: it’s time to bring taxation laws into the 21^st century. They have outlived their use-by date.

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