Housing affordability continues to be a hot topic, and right now the old chestnut of replacing stamp duty with a universal land tax is doing the rounds again.
The idea has been around for over a decade, after ex-treasury chief Ken Henry claimed that stamp duty not only is a disincentive for people to move, but also gives state governments an erratic income; their coffers overflow when the property market is booming, but revenue withers away when the market slumps.
The New South Wales government is so enamoured with the idea that it has commissioned a consultation paper, inviting people to give their views. The proposal envisages that, from the introduction of the change, a homebuyer could opt to pay either stamp duty on purchase, or an annual land tax, which would be based on the land value of the property, attached to the property forever. In other words, once any purchaser has opted for the annual land tax option in lieu of stamp duty, there is no going back.
In the event of the scheme being popular, the consultation paper envisages a price threshold based on the value of the property. If that was the case, a buyer of a $5 million property would still be liable for stamp duty on purchase, and could not opt to pay land tax instead.
State governments currently receive over $20 billion a year from stamp duty, so any transaction would need to be phased in. The current proposal floats the possibility of the amount of stamp duty forgone being capped at, say, $2 billion in the early years - with the cap changing over time as the number of people opting out of stamp duty grew.
Proponents claim that the property market would boom, because buyers could use the money now required for stamp duty to increase their deposit and qualify for bigger loans. Of course this begs the question, do we really want to encourage homebuyers into even bigger loans? After all, interest rates are near bottom and must rise at some stage.
But a major problem with a tax based on land values is that in many states it's common practice to leave the rate of land tax un-indexed, which means that every time a property increases in value, so does the land tax bill.
A homeowner who chose the land tax option would most likely be faced with an increasing land tax burden as the years passed. This could be particularly hard on retirees, who would see their home costs increasing while their capital decreased.
The major flaw in the proposal, however, is the free kick it would give to property speculators. It's generally accepted that property speculators competing with genuine homebuyers have been a major force in pushing up prices to record highs. Stamp duty is a major impediment to speculators who want to buy property for a quick turnover. They would have a field day if they could choose an annual land tax bill. If they held the property for just a short time, there may be no land tax at all to pay.
There is a further complication. Investors already pay land tax on rental properties, and this cost is usually passed on to their tenants. It would be unfair if stamp duty - which is a capital cost, not a deduction - was eventually waived on property purchases for investors, while continuing to allow them to claim a tax deduction for the land tax, which is indirectly passed on to the tenants.
This is just a consultation process. Let's hope further consultation shows it up as the disaster it may well be.
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Noel answers your money questions
We have recently paid off our mortgage and are wondering what we should do with the title deed. The bank offered to hold it for us, but I wonder why they would do that. If we do get it where should we keep it - is there risk in having it in the house documents file.
Many people choose to leave their mortgage unreleased with the bank to save fresh costs if they need to borrow again in the future. That's always been my choice. It's important that all your documents be held in a safe place and these include wills, powers of attorney and title deeds. You can buy a fireproof box quite cheaply but make sure that all your family know where it is kept and have access to it if an emergency arises.
My spouse, aged 73, does not have a superannuation account as she closed it 10 years ago. Will she be permitted to start one and make non-concessional contributions under the proposed abolition of the work test rules.
In this month's budget the government announced that individuals aged 67 to 74 would be able to make non-concessional (after-tax) contributions to superannuation on the same terms as those currently applying to individuals under age 67 by removing the work test for contributions. However, this applies only to contributions that are made after July 1, 2022. Given your spouse is 73 now she may just scrape in.
The current rules which require people aged 67 and over to pass a work test will remain in place until June 30, 2022. Readers should keep in mind that although the work test will be removed for non-concessional contributions from July 1, 2022, the test will be retained for personal deductible contributions. They can be made only by salary sacrifice.
The removal of the work test for older Australians also includes increasing access to the bring-forward rule for non-concessional contributions. The bring-forward rule can allow an individual to make three years of non-concessional contributions in one year (eg. up to $330,000 from July 1, 2021). However, the ability to make non-concessional contributions will continue to be subject to an individual's total superannuation balance being less than the transfer balance cap (currently $1.6m increasing to $1.7m from July 1, 2021) at June 30 of the prior year.
I am looking to borrow money through the Pension Loans Scheme. I have an investment house worth $880,000 with no mortgage and am retired with no superannuation. I spoke to Centrelink and was told we could not get a loan via the PLS because we were not eligible for an age pension. Yet I read in your books that we should be eligible even if we cannot get the age pension. When I look at the Centrelink website it says that you or your partner must have reached aged-pension age and be eligible to get a qualifying pension. Is it correct I am not eligible for a PLS loan?
The Centrelink website is extremely confusing and it's unfortunate their staff are giving you the wrong information. I've spoken to Paul Rogan of Pension Boost, who specialises in the PLS and he says that the requirement is that you qualify for a pension in terms of residency and age, but not eligibility in terms of assets and income. However, you must own eligible property. Therefore, based on what you have told me you should be eligible.
Some time ago I lent a friend $5000 to buy a share. The arrangement was that he would return the $5000 plus 20 per cent of any profit when he sells. Will I have to pay tax on the $5000 lent to him when it is returned? How will the tax on the profit be apportioned? If he pays the tax first and gives me 20 per cent of the balance, do I have to pay tax again?
There would be no tax payable on the return of the capital sum of $5000. However I suggest you clarify precisely how the asset will be held. For example, if your friend holds the share in his own name, he will be liable for any tax on the profit and how much this is will depend on how long he holds a share, whether he is a trader, and what his income is in the year of disposal.
On the other hand if he was holding the share as trustee for you the share of the profit could be apportioned to you. This is really something you should discuss with your accountant. I hope this arrangement has been documented. It's got the potential to be a minefield.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. email@example.com