Read: Access full Victorian State Budget 2018/19 review here
Budgeting for property
Unlike the last few years, this year’s Budget does not introduce any new property taxes. However, the Budget highlights the risk of the government’s heavy reliance on property-related taxes (which comprises approximately 48% of total state taxes revenue), which are prone to fluctuations in the market.
The Budget also raises concerns about the impact of the property-related measures introduced in recent years, which include the limitation to the off-the-plan concession to home buyers who qualify for the principal place of residence stamp duty concession or those who are eligible for the first homebuyer stamp duty concession. This change has resulted in a significant change in the property market landscape, as investors are no longer able to benefit from the off-the-plan concession, resulting in large increases to the amount of stamp duty payable on investment properties.
The strength of the property market has boosted state revenue over the last decade, as is apparent from the overall growth in state revenue from the collection of property related taxes (land tax and land transfer duty), in conjunction with the growth in other taxes (such as payroll tax).
This year’s Budget recognises that the contribution from property-related taxes, particularly land transfer duty (which typically has had the highest correlation with growth in total taxation revenue), is expected to decrease as the housing market cycle moderates and growth rates ease, as indicated by auction clearance rates, housing finance data and property price growth rates. Land transfer duty, for example, is now expected to grow by a relatively modest 3.8% to $7.1 billion in 2018/19, which is significantly less than the estimated 11% growth rate that appeared in last year’s Budget.
The forward estimates assume that property taxes revenue as a proportion of total tax revenue is expected to remain constant at around 48%. We question whether this assumption is too optimistic in light of the expected completion of many apartment projects in a few years’ time, which are already struggling to find buyers. We are concerned the estimates have not factored in the impact of recent tax changes that are distracting investors, in particular, the changes to the off-the-plan concession.
Possible rethink and reform
With the State election due later this year, we think it would be timely for the government to review the impact of the changes to the off-the-plan concession, as well as other recent measures such as the vacant residential land tax, the absentee owner land tax surcharge and foreign purchaser additional duty, to determine if there should be a rethink in relation to these measures based on the market impact. In our view, now is the time to consider tax policies that re-stimulate the property development market. In the absence of a change in policy, we are concerned there could be a sharp or sustained downturn in the residential property sector. If such a downturn were to occur, there would be significant flow-on effects to employment in the building and construction sector and the government’s bottom line.
Impact on middle market businesses
There were no new property taxes introduced in this year’s Budget. It is positive to see that the abolition of stamp duty for first time buyers of homes up to $600,000 in value (with a tapered discount applying to homes valued between $600,000 and $750,000) and the doubling of the First Home Owner Grant have seen an increase in the number of first home buyers purchasing homes across Victoria, which have created investment and planning opportunities for developers, especially in Victoria’s growth areas.
However, it will remain important for property investors and developers to consider the impact of property related taxes on their future plans. In light of the complex suite of new property taxes introduced in recent years, which create additional costs and complexity for property acquisitions and holdings, combined with changeable economic, planning and financing environments, we think that it is as crucial as ever to ensure that appropriate consideration is given to the impact of these taxes on all facets of property-related ventures and investments.
Young farmer land transfer duty exemption broadened
For property settlements from 1 July 2018, the young farmer stamp duty exemption threshold will be lifted to $600,000 (from $300,000). This means that young farmers under the age of 35 buying their first farm could qualify for a full exemption from stamp duty for land purchases valued up to $600,000 (with a concession applying to purchases valued between $600,000 and $750,000), similar to the current exemption/concession for first home buyers.