The State of State Taxes: Reform or Land Grab?

The IPA Business Tax Calculator

For the last two years we have reported on the Institute of Public Affairs annual review of State taxes affecting businesses. The most recent report, for the year to December 2011 is entitled “Business Bearing the Burden” (the full report can be viewed at: http://ipa.org.au/publications/1641/business-bearing-the-burden).

For the third year in a row, South Australia has received the gong for the highest taxing State. There are, however, some qualifications to this. The way that the IPA report reviews State taxes is by reference to a hypothetical business entity called a “reference” business of medium size with characteristics determined by a number of criteria. The total amount of major State taxes payable by the model reference business in each State in 2011 was calculated within a range from:

• lowest (NT) $225,729

to

• highest (SA) $299,703

with an average cost of $277,913.

When the IPA Calculator is applied to businesses of varying sizes, there are different outcomes.  Figures are given in the report for businesses that are 10%, 15% and 200% of the size of the standard reference business. This produces interesting variations in the highs and lows:

As in previous years, SA is at the low end of the scale for payroll tax with a notional cost of $187,163 for a reference business. Only the NT is lower with $158,458, and the average is $192,326.

Where SA increases the “take” is through land tax and stamp duties. For a reference business in SA, the costs are:

• land tax $44,353 (SA highest; NT lowest $0; average $21,647)
• stamp duty $68,187 (Vic highest $74,383; average $63,940).

A breakdown of specific State taxes for different size businesses (in relation to a reference business) also shows some interesting variations:

HIA Report

The Housing Industry Association (HIA) has commissioned a report on the Centre for International Economics on Taxation of the Housing Sector (the full report can be found at: http://hia.com.au/media/Industry-policy/~/media/Files/documents/CIE%20Tax%20Report.ashx). The report is dated 8 September 2011, but only seems to have recently received publicity. In The Australian Financial Review of 12 April 2012, the headline of an article reads:

House prices up to 44pc tax: HIA report.

This grabs attention, but the report is complex (92 pages) and it is necessary to understand what is taken into account as “taxes”.  The report says “Some taxes are explicit; others may be hidden or ambiguous”. In the report a detailed explanation is given of these terms. A summary, in relation to housing, appears on page 16:

• explicit direct and indirect taxes – taxes that are levied suddenly to raise general Government expenditure such as payroll tax, stamp duty and income taxes;
• ambiguous taxes – taxes that could be viewed as user charges or taxes, such as infrastructure levies, long service leave levies and building permit fees;
• hidden taxes – arrangements that increase the cost or reduce the profitability of building new housing often to achieve other social objectives such as building standards and zoning restrictions; and
• subsidies or negative taxes – such as assistance for first home buyers and capital gains exemptions.

The 44% component of house prices appears in two places.  An analysis of housing costs is contained in the report only in relation to the three “major” cities of Sydney, Melbourne and Brisbane.  Taxes on housing are calculated in the following table:

44% also seems to be the top for Greenfield and infill development.  The report says (at page 36):

Raw land (undistorted by zoning and delays) and development costs represent the largest cost component in both Greenfield and infill development.  The remaining cost components represent Government taxes and charges which equate to:

• 44 per cent of Greenfield development and 22 per cent of infill development in Sydney;
• 33 per cent of Greenfield development and 22 per cent for infill development in Melbourne; and
• 37 per cent of Greenfield development and 29 per cent for infill development in Brisbane.

The burden of taxes for home buyers is substantial.  The report includes that models of the Australian economy “indicated most of the burden (incidence) of taxation on housing falls on home buyers and existing owners.  Only a small per cent of the burden (2 to 6 per cent) falls on the owners of land, producers and suppliers” (page 9).

The report also says that “It should be noted that housing is taxed twice, when it is being built as well as on an on-going basis”, and concludes that “the removal of taxes from the housing sector would see the majority of benefits accruing to households” (page 10).

This source of taxation is obviously a substantial component of revenue for Government.  The report notes:

The housing sector is one of the most heavily taxed sectors of the Australian economy, both in absolute and relative terms.  The housing sector contributes between $36 billion and $40 billion in taxation revenue each year to federal, state and local governments in Australia.  This equates to 11 to 12 per cent of the total revenue collected by all tiers of government.  Only one sector, wholesale and retail trade, contributes more and its contribution is only marginally larger.

Tax Reform Proposals

Both the IPA Report and the HIA Report point to the inefficiencies and distortions that are inherent in the State taxation systems and call for reforms.  The Tax Institute in its budget submission also makes submissions for State tax reform and for the establishment of an independent Tax Reform Commission to develop recommendations of the Henry Review into a detailed, workable and affordable set of reforms.

Regrettably, the chances of any substantive or meaningful review of State taxes are probably minimal.  In South Australia, as noted in our newsflash in December 2011 (“Broken Promises on Business Taxes”) the South Australian Government reneged on its decision pursuant to the Inter-Governmental Agreement on Federal Financial Relations (“IGA”) to abolish stamp duty on non-real property transactions from 1 July 2012, and extended this until 1 July 2013, the maximum date permitted by the IGA.

Amendments to the Stamp Duties Act in South Australia have also now come into effect to bring into operation the land holder regime which replaces the former land rich provisions of the Act.  Under the new land holder regime, a land holding entity will be any relevant entity (which may be a company or trust) which holds any direct or indirect interests in land worth $1 million or more.  The previous requirements of the land rich regime that the land interests must represent more than 60% of the total value of the entity’s assets, or 80% for a primary production entity, no longer apply.

The definition of “land” has been expanded to include mining and mineral and agricultural leases, and the definition of “local land asset” now includes anything “fixed” to the land, whether or not the item is separately owned, and whether or not the item constitutes a “fixture” at law.

The 2012-13 SA Budget

When we were preparing this article  we were waiting for the SA Budget for 2012-13 to be released. Our prediction then was that the State Government would continue to extract taxes from any form of land or notional form of land and that there was no prospect of any reform or relief. This was correct.

The Budget was handed down on 31 May 2012, and the only tax-related measures announced are:

1. Introduction of a stamp duty concession that will apply for the next four years for purchases of off-the-plan apartments within the area of The Corporation of the City of Adelaide.
2. Removal of the phase out of the $8000 First Home Bonus Grant for eligible transactions entered into between 1 July 2012 and 30 June 2013.
3. Abolition of the payroll tax exemption for apprentices and trainees.
4. Introduction of a stamp duty exemption for a conveyance of a carbon right created under an Act of the Commonwealth or a conveyance of a renewable energy certificate created under the Renewable Energy (Electricity) Act 2000 (Cwth).
5. Abolition of stamp duty on non-quoted marketable securities and on non-real property transfers will both be deferred until budget circumstances allow.

So, the only minor good news in the SA Budget in relation to taxation of property transactions is the limited concession for off-the-plan apartments in Adelaide, and the continuation of the First Home Bonus Grant scheme to 30 June 2013. There is no joy for business, and the deferral of non-real property transfer relief under the IGA is now even more vague as it is now deferred “until budget circumstances allow”, i.e. “watch this space!”.

The Verdict on the SA Budget: SACES Appraisal

The South Australian Centre for Economic Studies issued an appraisal of the 2012-13 SA Budget on 18 June 2012 (http://blogs.adelaide.edu.au/saces/2012/06/18/media-releases-june-2012-economic-briefing/).

Overall, the SACES verdict was not kind to the Budget, although acknowledging some good things. On fiscal responsibility criteria it said that the “Budget does not score well”.

On progress in tax reform SACES concludes that the Budget “is more negative than positive”, with the indefinite deferral of the abolition of nuisance taxes in accordance with the IGA being“clearly a step backwards in terms of taxation reform”.

The SACES comment concluded with a reference to the Henry Review:

The Henry Review also pointed towards State governments shifting away from their present heavy reliance on stamp duty on housing conveyances, and towards greater use of the land tax base. This Budget does nothing to advance matters on that front. Indeed the announcement of a four year stamp duty concession for certain conveyances in the Adelaide City Council area (already referred to above), has the effect of rendering an already bad tax even worse.

Is Reform Realistic?  The ACT Example

The ACT Budget, handed down on 5 June 2012, shows that it is possible for states and territories to make some effort to change from what the Budget Paper described as “inefficient” taxes to “fairer, broader-based taxes”.

The Budget follows the ACT Taxation Review which found that “own source taxes” (other than GST) “are volatile, unfair and inefficient, and therefore unsustainable in the long-term”.

The Budget is intended to initiate the first 5 year tranche of long-term reform of the ACT tax system, with key elements being:

• abolishing transaction taxes;
• adopting a broad-based land tax (“General Rates”) for revenue replacement;
• improving progressivity of the revenue base;
• abolishing nuisance taxes; and
• simplifying the overall taxation system.

The measures in the 2012-13 Budget, which are intended to be revenue neutral, include key reforms to:

• phase out conveyance duty (over 20 years);
• abolish duty on insurance after 5 years;
• abolish commercial land tax;
• reduce payroll tax; and
• abolish duty on short-term leases and transfers of sub-leases.

The reforms are to be funded through increases and adjustments to General Rates for the commercial and residential sectors and a Utilities Network Facilities Tax.

The Path Ahead for States and Territories

The ACT reform shows that it is possible to take steps to wean governments off a reliance on the sorts of arbitrary, inefficient taxes discussed earlier in this article.

The review of ACT taxes picks up on recommendations in the Henry Review, such as the abolition of conveyance duties and a shift to a broader-based land tax (General Rates).

Unfortunately, the likelihood of other states and territories following the ACT lead seems remote.

The “Game Changer”

From even further in left field has come the suggestion in a report of the Grattan Institute (Game-Changers:  Reform Priorities for Economic Growth in Australia) to extend the base of the GST. The report, released on 7 January 2012, advocates extending the base to include health, education and fresh food, which are currently exempt and which equate to approximately 40% of spending. This would allow the states and territories to abolish the inefficient taxes they currently rely on.

Other recommendations include lifting the retirement age to 70, beyond age 67 currently proposed by the Federal Government by 2023.

Apparently the GST suggestion, with its political repercussions, has led to rare by-partisan Labour and Liberal agreement that this will not happen. It is a pity that there could not be such prompt and unanimous support for reforms that could be useful, and could happen.