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Tax issues : Down with duty

Every Issue

Cite as: (2003) 77(9) LIJ, p.82

Victorian land transfer and conveyance duties need a drastic overhaul.

In a series of public presentations and interviews over the past few months, federal Treasurer Peter Costello has urged state governments to make substantial cuts to usurious stamp duties on land transfers and conveyances.[1]

The federal Treasurer makes the point that while the property market has moved up, state governments have not adjusted the thresholds or their rates. In 1998, stamp duty payable on a median house was $6000. As a result of the boom, the duty on the same median house in Victoria in 2003 is now around $15,000. This, as the Treasurer notes, is an increase in the stamp duty burden of more than 150 per cent over five years, which is a sustained growth in values of 30 per cent per annum. Further, as prices have risen, they have kicked purchasers into higher rates of duty – what used to be called bracket creep.

Mr Costello notes several ironies about this. The first is that the federal government has just given effect to income tax cuts and bracket adjustment with effect from 1 July 2003, in an environment where wages are going up by a relatively paltry 3 per cent per annum. The Treasurer has acknowledged that if incomes were going up at 30 per cent per annum the federal government would be forced to make correspondingly bigger adjustments to income taxes. However, as he points out, in Victoria and New South Wales there have been no adjustments to conveyance duty rates in decades.

The second irony he notes is that one reason that the housing market has been so strong is the federal government’s $7000 First Home Owners Grant. The grant was introduced, coinciding with the GST start-up on 1 July 2000, to compensate potential first home buyers for the jump in median house prices as a result of the start of the GST. At the time the federal government pointed out that the grant would bring more people into the market and prices would go up, and if the state governments did not adjust their stamp duty thresholds they would collect millions of extra revenue. What has happened is that on a median house the federal government is now giving a $7000 grant to first home buyers, who are paying $9000 more in stamp duty than they did three years ago. The benefit of the grant is being captured, not to the benefit of the buyer, but to the benefit of the state revenue authorities.

It is impossible not to look back to the GST start-up on 1 July 2000 and argue, with or without hindsight, that much greater adjustments should have been made to the state stamp duty bases. For example, when GST was introduced in New Zealand in 1985 conveyance duties were slashed to a top rate of 2 per cent and ultimately abolished in May 1999.

The UK story is similar with conveyance duty rates cut to a relatively insignificant 1.5 per cent top marginal rate when the UK Value Added Tax was introduced.

Mr Costello’s Victorian counterpart is at the forefront of criticism over the windfall conveyance duties flowing to the states from the sustained property boom, the First Home Owners Grant, the low interest rate environment, the impact of GST in increasing dutiable (GST-inclusive) property values, and the application of high, pre-GST rates of duty.

With marginal duty rates of 5.5 per cent for the top bracket of property values, Victoria and New South Wales have the highest levels of conveyance duty (as well as the most buoyant property markets). But Victoria has an even higher marginal rate of duty of 6 per cent on property values between $115,001 and $870,000. This is the bracket that captures most of the value of most house transactions.

In 2002-03 the Victorian State Revenue Office (SRO) collected $1.85 billion in conveyance duty.[2] This was $700 million more than the original budget figure. If, instead, land transfer and conveyance duty had been levied at the more orderly post-GST rates of 2 per cent (as in New Zealand and the UK), then the duty raised would have been in the order of only $675 million. This equates to a staggering SRO windfall of $1.175 billion for 2002-03 on account of high, pre-GST rates of duty.

Mortgage security duty raises the level of stamp duty on the purchase of real property by a further 0.4 per cent of the amount of the purchase price that is borrowed by the buyer. This is likely to be up to 90 per cent of the purchase price for many first home buyers. Revenue from mortgage duty for 2002-03 was $175 million ($50 million more than the original budget figure) and is estimated to fall to $152 million in 2003-04 before it is abolished on 1 July 2004.[3] However this is hardly the measure of adjustment that, as the federal Treasurer points out, is warranted in respect of current pre-GST rates and brackets of conveyance duty.

In many respects, the momentum for land transfer and conveyance duty reform is similar to the pressure that was put on the state government in the property boom of the late 1980s and early 1990s. At its height, the “land tax revolt” included public rallies organised by major businesses and business associations. This prompted the then Labor government to commission the Fordham Report, which was tabled in Parliament in August 1991. This resulted in sweeping reforms to the Victorian Land Tax Act in November 1991, which received widespread public and bipartisan support.

The business sector has a strong interest in seeing similar reform of Victorian conveyance duties. This is particularly so given that the SRO has in more recent times moved to capture conveyance duties of 5.5 per cent or so on the value of intangible business assets. These claims are currently before the courts in a number of test cases that are either awaiting judgment[4] or on appeal.[5] These test cases have created substantial uncertainty for businesses seeking to measure their potential stamp duty liabilities on acquisitions and mergers that involve freehold property. They also have the prospect of substantially enlarging the SRO’s collection of conveyance duty from business acquisitions.

The SRO has sought to squeeze a broad, mainstream general duty on business acquisitions out of an extreme, marginal interpretation of valuation provisions of the Stamps Act 1958 (Vic) which have been substantially reproduced in the Duties Act 2000 (Vic).[6] Each test case[7] involves a claim for duty calculated on the values of intangible business assets, including categories of goodwill associated with intellectual and industrial property rights, notwithstanding that:

  • even on the most cursory comparison of the Duties Act with its interstate equivalents, it is patently clear that the Victorian Parliament has not enacted and has never intended to enact a general duty on business acquisitions;
  • historically, having regard to the former Stamps Act and its interstate equivalents, it is patently clear that the Victorian Parliament has never enacted a general duty on business acquisitions; and
  • the Victorian Supreme Court and the Court of Appeal are yet to deliver verdicts on these test cases.

It is hoped that the Victorian Treasurer listens to and acts on the calls for urgent stamp duty reform coming from his federal counterpart. It is also hoped that he takes note of recent test cases taken by the SRO which would substantially increase the conveyance duty taken on business acquisitions.

Victorian land transfer and conveyance duties need to be dramatically reformed, as in the UK, or abolished as in New Zealand. The current levels of land transfer and conveyance duty cannot be justified. Nor can any moves to expand them, either by SRO interpretation or otherwise.

Inaugural Inspector-General of Taxation appointed

Federal Minister for Revenue and Assistant Treasurer Senator Helen Coonan has announced the appointment of Sydney tax consultant David Vos as the inaugural Inspector-General of Taxation.

Mr Vos was awarded an Order of Australia in 2000, largely in recognition of his important contributions to the design and implementation of the New Tax System, especially GST.

Senator Coonan said that the sole focus of the Inspector-General will be on systemic tax administration matters rather than individual taxpayer issues, which will continue to be handled by the federal Taxation Ombudsman. Senator Coonan said that the government is pleased to have an Inspector-General who can act in a quick and responsive fashion to cut through red tape and advise the government on problems in the taxation system. She said that Mr Vos’s practical understanding of the taxpayer experience with the system makes him an ideal source of advice to government and an effective advocate for taxpayers.

JAMES JOHNSON is a sole practitioner and principal of Sutton Johnson Taxation Lawyers.

[1] See, for example, the presentation by Peter Costello to the King David School of Business, Melbourne on 31 July 2003.

[2] See Department of Treasury and Finance, Budget Papers 2002-03, Paper No 3, p391, table 3.2.

[3] Note 2 above, p394, table 3.5.

[4] See June 2003 LIJ and July 2003 LIJ Tax Issues columns; see Primelife (Glendale) Pty Ltd v Commissioner of State Revenue and Primelife (Cumberland View) Pty Ltd v Commissioner of State Revenue (undecided, 10 April 2003, Harper J).

[5] See Uniqema v Commissioner of State Revenue [2002] VSC 157 and Australian Rice Holdings v Commissioner of State Revenue [2001] VSC 486.

[6] Notes 4 and 5 above.

[7] Notes 4 and 5 above.


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