Stamp duty is highly inefficient. It gives rise to multiple costs in a development, acts as a disincentive for people to move to where there are employment opportunities, and also leads to a greater size of housing stock as people are encouraged to upsize through renovation, but downsize through moving.
Insurance taxes and emergency service levies are also regressive and inefficient. They give rise to underinsurance and non-insurance. Further, at least in the case of major disasters, they place greater burdens on the government which often has to step in where there is no insurance cover.
Land tax, by contrast, is a very efficient tax base due to the immobility of land. If appropriately structured, it can also be progressive. Certainly it would better deal with the inherently regressive nature of insurance taxes and fire service levies and the disadvantage arising from under insurance.
With this in mind, we would suggest abolishing stamp duty on the transfer of residential and commercial property and conflating rates, land tax, insurance taxes and emergency service levies into a new property services tax.
Admittedly, there are some difficulties to overcome here. One relates to the fact that people might struggle with a lack of ready cash to pay for this new form of land tax.
That wouldn't be everyone of course. For those who are paying stamp duty with additional borrowings, replacing stamp duty with land tax would present some cash flow differences. However, the effect in both cases is to spread the cost. On the other hand, the imposition of land tax on those with a fully paid mortgage – most often older people – could result in hardship.
To deal with this, we propose that those over the age of 60 be able to defer 80 percent of their property services tax payment until they dispose of the property, or pending death. This deferral would come with an interest cost and would be optional. It would also be made available to a selected group of others including, for example, disability pensioners. Meanwhile, there would be pro rata rules for joint ownership.
A second difficulty arises due to the simple fact that those who have recently paid stamp duty suffer a detriment if the base moves to ownership of land.
I would make two observations here. Firstly, the greater the time lapse between purchase and the change of tax base, the lower the transitional inequity and, indeed, the lower the effective tax rate of the stamp duty.
Secondly, the cost of stamp duty may be differently capitalised into the value of property when compared to land tax which is spread over time.
Still, these factors would need to be taken into account when formulating transitional measures through the change of base.
Under our proposed scheme, two thirds of the property services tax would be spent locally, based on the desired form of local government attributable to the relevant state or territory.
One third of the property services tax would go into a Property Services Equalisation Fund, which would then distribute funds to local governments to help equalise their capacity to provide local infrastructure and services. The remainder of the funds would be used for projects involving multiple local entities.
At the same time, current Federal Government funding of local government, which includes per capita and local road funding of about $2.3 billion, would be redirected to the Property Services Equalisation Fund.
All in all, there is much to be said for a property services tax.
Read more about KPMG's submission to Treasury.