Latest NewsStamp Duty on Home Loans to Be ScrappedWednesday, 17 August 2016

Stamp duty on housing loans is set to be abolished after the Henry tax review, which is likely to recommend states be given a share of income tax to make up the difference.

The most likely path to do this would be for the commonwealth to give the states the ability to impose their own surcharge on income tax, which would be collected for them by the Australian Tax Office.

The Henry review has been inundated with submissions calling for the end of stamp duty. Tax economists argue that the tax on moving house, although easy to collect, leads to poor use of the housing stock and poor labour mobility.

Having to pay stamp duty not only discourages elderly people from moving to more appropriate accommodation, it also deters people from moving house to a better jobs market.

At a conference conducted by the Henry tax review at the Melbourne Institute last week, both international and Australian tax economists said stamp duty should go, with Melbourne University professor John Freebairn describing the tax as "a piece of garbage".

The review panel is being influenced by state submissions arguing that replacing stamp duty by extending other state taxes, such as payroll tax or land tax, would be too difficult to implement nationally.

Tasmanian Treasury secretary Don Challen, who is close to the inquiry's head, federal Treasury secretary Ken Henry, told last week's conference that reform of state taxes would succeed only with leadership from the national government.

"If you want to achieve a difficult reform, you've got to make it a national one," Mr Challen said.

He said it would be too hard to win political consensus to extend land or payroll taxes.

"It requires eight lots of political commitment and eight lots of legislation and that path is doomed to failure," he said.

However, he said he believed states would be willing to act on stamp duty if the commonwealth provided an avenue for alternative revenue. The idea of giving states a cut of income tax was pressed two years ago by the OECD, which suggested the states "piggy-back" on income tax. The OECD also urged states to drop stamp duty.

One of the world's leading experts on federal taxes, Canada's Richard Bird, said the states were heading for a financial crisis because they did not have a sufficient tax base to support their burgeoning health and education costs, which were all rising much faster than the consumer price index.

One of the problems with stamp duty for the states is that it is vulnerable to the state of property markets. Stamp duty usually raises about $14 billion a year for the states, but the recent state budgets showed big falls of more than $1bn each in NSW and Queensland, in 2008-09, for example.

"In Australia, it should certainly be feasible to permit states to impose a surcharge on the federal personal income tax base," Professor Bird said.

He said that, ideally, Australia would follow the Scandinavian practice of allowing states to have a flat tax surcharge on income, rather than mirroring the commonwealth's progressive taxation. The states would be allowed to set their own level, making states more responsible for their own finances.

It would require a surcharge on income tax receipts of a little over 1 per cent to match the income raised by conveyancing stamp duties.

Dr Henry has not given his views; however, in a speech earlier this year he canvassed the possibility of states levying different rates on a nationally consistent tax base.

"Such an approach could avoid problems with tax-base erosion from interstate competition and make it easier for businesses to understand and comply with their obligations, while still providing the states with a policy lever to respond to jurisdiction specific preferences," Dr Henry said.

He said the review was close to putting some "big ideas on paper", but he would take advice from the government about whether the review could consult broadly about them before completing its final report, scheduled for the end of the year.

Dr Henry said that one of the problems facing the inquiry was that it was not motivated by an immediate crisis in the tax system, so it was hard to build support for radical tax change.

"The Australian government has identified an opportunity and asked us to come up with reform proposals that will be durable and anticipate changes like demographic change," he said.

Dr Henry said many of the review's ideas would be for implementation over a longer term; however, it would also have some more immediate suggestions.

Australian School of Taxation director Neil Warren said state taxation was likely to be at the top of the list for immediate change because it could be achieved without too much political fall-out for the federal government.