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Why the Australian property market is undersupplied: Housing is very heavily taxed
Topic Started: 20 Apr 2012, 12:43 AM (599 Views)
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Housing needs a supply-side tax scrap

Stephen Kirchner
Published 9:47 AM, 18 Apr 2012

A fundamental truism of economics is that if you tax something, you get less of it. Tax is thus a good place to start in seeking to explain why Australia’s housing market is chronically undersupplied, with adverse implications for housing affordability.

Many commentators have argued that housing is tax advantaged because of the principal residence exemption from capital gains tax. They see the exemption as a source of increased demand for housing and a negative influence on housing affordability rather than a boost to housing supply.

This leads to the incorrect conclusion that housing affordability could somehow be improved by abolishing the principal residence exemption and other tax concessions. For example, journalist George Megalogenis has written that “housing can only become more affordable if prices stop rising… It can only be done by making property less attractive than other investments, such as shares or superannuation … bricks-and-mortar should lose its taxpayer supports".

The Henry Tax Review was commendable for rejecting the view that saving via owner-occupied housing should be taxed. The Henry Review favoured an expenditure tax benchmark that exempts the returns to saving from tax, including saving via housing. The final report’s recommendation that saving via owner-occupied housing remain tax-exempt was explicitly based on this benchmark. The final report also recommended that the returns to other forms of saving, including capital gains on other assets and net residential income and losses, should enjoy a 40 per cent tax discount.

The Henry review made clear that the problem with Australia’s tax system is not that saving via housing is taxed too lightly, but that other forms of saving are taxed too heavily. The principal residence exemption from capital gains tax is in fact model tax policy based on an expenditure tax benchmark.

Henry’s suggested move to a 40 per cent savings income discount is designed, among other things, to remove “the current bias towards negatively geared investment in rental property and shares". However, this recommendation was made subject to the important proviso that supply-side constraints in the housing market need to be tackled first and that phase-in arrangements should apply to minimise disruption to the housing market.

The final report noted that “changing the taxation of investment properties could have an adverse impact in the short to medium term on the housing market … reducing net rental losses and capital gains tax concessions may in the short-term reduce residential property investment. In a market facing supply constraints, these reforms could place further pressure on the availability of affordable rental accommodation".

The pre-occupation of many commentators with the principal residence exemption from capital gains tax and negative gearing has diverted attention from the fact that housing in Australia, far from being supported by the tax system, is in fact very heavily taxed. A recent report by private consultancy, the Centre for International Economics, “Taxation of the Housing Sector in Australia”, prepared for the Housing Industry Association, quantifies the tax burden and its adverse implications for housing affordability.

The tax burden on new housing includes direct taxes such as the goods and services tax, stamp duty, land tax and council rates, as well as a variety of indirect taxes on inputs into housing and hidden taxes that arise from the planning and approvals process. CIE estimate that these taxes account for 44 per cent of the purchase price of a representative new home in Sydney or around $267,879. Most of the burden of these taxes falls on home buyers and not home builders because the demand side of the housing market is less price sensitive than the supply-side.

The tax burden on housing also accounts for much of the financing cost of a new home and thus the burden of mortgage debt and associated interest payments. The cost of financing the tax component of the price of a new house in Sydney is equivalent to 33 per cent of the after-tax income of a young couple aged between 24 and 35 on average wages. The burden is even higher in the first year when stamp duty is paid, accounting for a staggering 72 per cent of after-tax income.

Australia’s under-supplied housing market and housing affordability problem is largely due to the tax burden on housing. Abolishing the principal residence exemption from capital gains tax and negative gearing would only add to this tax burden and further reduce housing supply.

Substantial gains in the efficiency of the tax system and housing affordability could be achieved through the substitution of more efficient taxes such as the goods and services tax for inefficient taxes on residential property. CIE estimate that replacing taxes on housing with a broadening of the GST base could increase GDP by around 2 per cent and increase residential construction by 14 per cent, providing a much needed boost to housing supply.

The main obstacle to a reform of this type is the dependence of state and local governments on residential property taxes, accounting for around 40 per cent of their total revenues. This points to the need for a federal-state compact on tax reform that finances the abolition of inefficient taxes on residential property through changes in the GST rate or base. State and federal governments unwilling to consider such a compact are not serious about addressing housing affordability.

The solution to Australia’s housing affordability problem is to build more and cheaper houses. This can only be achieved by easing the tax burden on housing and not through the abolition of existing tax concessions.

Read more: http://www.businessspectator.com.au/bs.nsf/Article/housing-property-affordability-henry-tax-review-ca-pd20120418-TFVVX
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NotFooled
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The Bear Whisperer

The government cares about increasing tax revenue, not housing affordability. In fact, I would argue that the government wants expensive housing because it advantages the large vested interests that have so much sway over politicians. You're not going to be able to change that.
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WA and NT see greatest property tax drops

Posted on Friday, April 20 2012 at 10:55 AM

Despite a slump in the Australian property market and tax revenue over the 2010-11 period, property owners paid $3 billion in property-related taxes, according to RP Data’s Cameron Kusher.

The 47.3 per cent in tax revenue for state and local governments over the 2010-11 financial period was a drop from 48.2 per cent the year before, however the total property-related tax revenue across all governments increased by 4.6 per cent over the year, said Kusher.

The total value of residential property transactions in 2010-11 fell by 17 per cent, he said.

Capital city property values fell by 1.4 per cent and transactions were down by 20 per cent compared to the previous year.

The three big property tax hits representing 93 per cent of total property tax revenue to the local and state governments are through municipal rates (up by 6.9 per cent over the 2010-11 period), then land taxes (up by 4.1 per cent), and stamp duty on conveyances (up by 0.3 per cent).

Because of reduced property transactions in recent years it’s clear that the stamp duty tax revenue has seen a fall, said Kusher.

However the stamp duty has risen over the 2010-11 period due to increases in New South Wales and Victoria. In other states stamp duty revenue has fallen in the same period; 14.1 per cent lower than its record level of $14.3 billion in 2007-08.

“Considering that since the end of the 2010-11 financial year property values and transaction volumes have continued to fall, we would expect that in order to grow tax revenue, state and local governments may be looking to again increase land tax and municipal rates as there is likely to be limited (if any) growth in stamp duty revenue,” Kusher said.

Each state and territory saw varied changes over the 2010-11 period, with the Australian Capital Territory recording a 14.2 per cent increase and Victoria a 10.7 per cent increase.

However in the same period property tax revenue fell in Western Australia and the Northern Territory (both by 9.6 per cent), and in Tasmania by 1.9 per cent.

In regards to land tax and municipal rates, Victoria saw the greatest increases (18.7 per cent), followed by the ACT (12.5 per cent), while Tasmania saw the biggest decreases (-17.6 per cent), followed by Tasmania (-1.9 per cent).

Kusher said property-related tax growth is likely to remain minimal over the coming year and it’s likely the governments will attempt to make adjustments to inject artificial growth in tax revenue.

Read more: http://www.apimagazine.com.au/api-online/news/2012/04/wa-and-nt-see-greatest-property-tax-drops
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TED BULLPIT
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Tax , tax, tax. As if we dont have enough already . I now have to pay a newly invented tax , the flood levy or flood tax if you like. So I now get taxed more when it rains too much. I was not the dope who bought my house in a dry creek bed yet I have to pay for these clowns mistakes. The bottom line is if it has flooded there before the chances are it will again, could be next week , month or next decade , why should I pay .

Now we have another bs tax about to slap us down , the oxygen tax , yes you will now be taxed for breathing out Co2 and for farting , and yet some people believe and want this crap. :wak:

Its seems things have been put in place to suck everylast dollar from you , weather it is the banks , the governments or the supermarket , shop a docket fly buy bs ptrol station monoploly. There is little hope for us, the marketers have most of us all sorted out , they all seem to know how sheep work these days .
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