Land tax, GST and the consequences for Australia's property sector

This article was originally published 12 February 2016.

Raising Australia's land tax has been floated as a potential alternative to raising the GST rate. But what are the broader implications of this move?

Reforms to Australia's tax regime have been in the spotlight recently, with increasing public discussion centred on how the system is performing and where there is room for improvement. The Prime Minister's recent announcement that GST won't increase has led many to consider where there might be room to adjust the tax system to raise government revenue.

One of the recent proposals is to increase the land tax imposed at the state level as an alternative to raising the GST rate. However, this option is far from an easy fix and could have far-reaching consequences for property investors and the sector as a whole.

Unpackaging land tax

Perhaps the single largest issue with treating a land tax raise as an alternative to a GST increase is the difference between the two forms of tax - distinctions that can be overlooked when both are treated as part of the same debate.

Furthermore, land tax represents just one of the current costs that property owners are expected to meet. Under the current system, property owners are responsible for transfer and landholder duties, income tax (including capital gains tax), rates and the existing land taxes or equivalent duties in each state and territory.

Land tax is already levied at “mum and dad” investors and to interest this burden can have a profound impact on their property portfolio and their long-term financial security and in some case there retirement fund.  As the influx of new property hits the market, this may weaken demand for second hand properties as the return on investment may not be as attractive to investors as new property.

Given how important the property market is for the country's economy, weaker investor sentiment could have widespread consequences for those working in sectors that depend on this activity.

Finding alternatives to raising the land tax

While the federal government has ruled out increasing GST for now, it is still an option for raising future revenue. This could be complemented with measures like a refundable tax offset, increasing of the tax free threshold or increased Centrelink benefits - options that can support those most affected by a GST rise. Alternatively, this increase could be offset by a decrease in state basis taxes.

If raising the GST rate remains off the table, it may be possible to increase the state-imposed land tax, provided it is matched by a corresponding decrease or abolition of the existing transfer duties. This avenue is one way to prevent a further slowdown in the housing sector stemming from an increased tax burden.

The ongoing public debate surrounding land tax and raising the GST rate is unlikely to subside. However, finding a suitable solution must consider these measures within the broader landscape of costs that property investors are subject to, as well as the potentially regressive nature of an increased GST rate.