New South Wales dips it’s toes in tax reform

Rebecca Archer

Welcome to Navigating the New Normal, Grant Thornton's podcast exploring trends in business and the marketplace. I'm Rebecca Archer, and today I'm joined by Steven Paterson, state taxes partner and Vince Tropiano, tax partner and Sydney Office Chair at Grant Thornton. Recently, we've seen some significant changes come to New South Wales regarding stamp duty being the raft of state taxation amendments which began in May. And now we have the first move to abolish stamp duty altogether. So, let's talk tax!

Welcome, Steve and Vince

Okay, so there are some big changes which have already started. Can you give us a bit of context? They seem to come in quite quickly.

Steven Paterson

Yeah, sure. So what we're seeing in the stamp duty landscape in New South Wales is a number of things, and the number of changes that happened were actually quite far reaching that there's two that probably strike me as things that people really should be looking at. And that's the expanding the duty base in New South Wales to an acknowledgement of trust, and a change of beneficial ownership. Those are the two things which I think will bring many more documents and transactions to be subject to duty, where they weren't subject to duty before.

Rebecca Archer

So that all seems quite technical. What should people be doing about it?

Steven Paterson

It's all quite interesting. The reason for the changes from the government's perspective is a tax integrity measure. They lost a fairly high-profile case last year and they've also been seeing some structuring, I think that they're not terribly pleased with, and these amendments are designed to overcome those and to prevent those from continuing to happen in New South Wales.

In terms of what people need to do, I think this is more of a tax advisory or a legal advisory piece; that it's a really good time for the lawyers and accountants out there just to revisit their documents and revisit their transaction structures for New South Wales. It's not necessarily going to mean changes for everything, but I think the one thing that people can, I suppose assume, is that what they did last time, it may not have the same outcome this time around.

Rebecca Archer

And so for the advisers who are at the coalface of all of this, is it the case of throwing out the rule book and really starting again?

Steven Paterson

Look, I don't think so. There are things that I think advisers should probably now take into account moreso than they did before. And the one thing that I would say in relation to taxpayers and clients out there is please, please, please keep your executed trust deeds in a safe place. What these changes mean is that it's going to be much more difficult to replicate those trusts in the future or to try and fix things which haven't been documented properly, without incurring another round of duty.

Rebecca Archer

And just to add to the excitement where you saw some more changes announced this week as part of the New South Wales budget, can you talk us through the basics of those?

Steven Paterson

Yes. So the government has been talking about bringing in a broad based property tax to replace stamp duty and land tax for the last two years now. What these changes are doing is not that; but it is more allowing first home buyers, for properties of $1.5 million or less, to be able to choose to pay an annual tax rather than paying a hefty stamp duty upfront when they buy the house.

Rebecca Archer

So essentially first home buyers would be able to choose to pay an annual land tax rather than paying a significant stamp duty payment when they buy a property. And I'm wondering how these changes will actually, on a practical level, effect first home buyers. And I guess the state in the long run.

Vince Tropiano

Look, you're right, Rebecca and I think the idea here is to support first homebuyers. Housing affordability has been a big issue in certainly New South Wales for a number of years, with the rapid increase in property prices and anything that could reduce that upfront cost. Where first homebuyers can remove that upfront stamp duty slug, and replace it with a property tax over a period of time, is certainly going to be beneficial for them. Albeit that it's limited to a fairly small group being the first home buyers with a value cap of $1.5 million. It will be a great assistance to that group. There's a couple of things that hang off that – one is how do you look at this from a wider perspective? And Steve alluded to it before that, this was there's been a lot of discussion around replacing stamp duty with property tax. This doesn't do it. It's a bit of a step in that direction. So I'm going to be looking closely to see what happens next. Thinking about it from a wider economic perspective, the New South Wales economy and business. How is this going to impact with business buying and selling properties? How's it going to impact with landlords and tenants; corporate tenants and the cost of these things being carried into rental yields and the like? Certainly there's going to be a benefit for the first homebuyers upfront. So the questions will be what happens next? When does this get stretched out in a manner in which the premier has already commented on what he'd like to do? And how is this going to play out into the corporate market? Steve, what are your thoughts?

Steven Paterson

I completely agree with all of that, Vince. And as we've been discussing over the last two years, effectively is the consequences that this will have on business? You're right, this doesn't do it, but I think it does set up a framework, which the more, much more difficult issues that the government needs to grapple with, to actually manage a change from stamp duty to a broad-based property tax. Really, are issues which have been left for another day, and I suspect that that other day will be post-election. I think that if the current government get reelected, then we may well see a lot more movement in relation to taking those steps to make it a much more broad-based property tax, and actually then start a real transition from stamp duty to property tax.

Vince Tropiano

And the other thing to note here is that as tax practitioners, we're always looking for trying to position more efficient taxes. You know, we work in that tax field, and we can see efficient and inefficient taxes, and looking to see what sort of tax reform might actually assist business. So there's a question here as to whether an ongoing property tax might actually be a more efficient tax than an upfront, lump sum stamp duty tax or impost, again from a cashflow perspective and just simply in terms of any easier way to collect. So there's a discussion to be had there in terms of the economic value of these sort of changes.

Steven Paterson

Indeed, and I think that everyone is told from an economist perspective, that a broad based property takes makes much more sense than a stamp duty. And just even having a look at the budget that was handed down this week. It was in real stark contrast. We had a record stamp duty take last year, off the back of a hot property market and rising value. Now that's dampened. But the dampening has meant that there's $4 billion less expected this year than last year, so the revenue at the moment is highly dependent upon a very volatile property market. So what a property tax does it smooths that out over the long run, which I can only see as beneficial.

Rebecca Archer

I'm interested to hear your opinions on how closely you think other states will be watching what New South Wales is doing and how it plays out for potential changes to their own systems.

Steven Paterson

That's a very good question. I think that if we were to start with a blank canvas that it would be a no brainer. The state governments would have a broad-based property tax. The problem of transitioning or making such a large reforms such as this is going to be winners and losers; and the added complexity, and this is an emotional one, in that Australians aren't used to paying tax on their home so that I think there is a very big emotional barrier which New South Wales has absolutely started to tackle, and which is why it's been talking about this for two years. It's to getting people used to the idea I think, that okay, well, these are the things that have made sense. It's not a new tax. It's not designed to raise new revenue. It's more to smooth the revenue. So, I think the other states are watching very, very closely not only to this reform when it comes in in January, but also to the election results because ultimately that is what is going to be front of mind when trying to make a reform as large as this.

Vince Tropiano

I think that's 100% correct. I think the other states will be looking closely at what happens here and they'll be cutting the numbers, and if the numbers work for them and they can see that this does not disadvantage their revenue take in any way and as Steve says, it might get rid of some of the lumps, but it gives them for one of a better word of regular cash flow. I would see that once New South Wales has ploughed the field in this, I’d see the other states will follow.

Rebecca Archer

How long do you think it will take before the New South Wales government potentially starts looking at applying this tax to beyond the first home buyer's market? Because, obviously, even for people who have maybe bought their first home and are looking to that next upgrade, stamp duty is a really big disincentive to move.

Steve Paterson

Look, it's a great question and it's interesting how this has all played out. If you were to talk to me at this time last year, I would have bet that it would be in within six months. From a New South Wales government perspective. It was very, very high on their agenda, and they were very well progressed in terms of how to implement it. What we then had in New South Wales was Delta and Omicron, which kind of put a freeze, literally, on a lot of things because that was a much more of a present emergency that needed to be dealt with. I think now, in terms of timing, the issue is not so much the health issues, it's now well, they're facing an election. So my betting would be that if they do get reelected, I think that it may well be quite quick in terms of moving to the next step.

Vince Tropiano

I agree. I think it will be in the next term Parliament once you've started this process. And as Steve said earlier on, the Premier, when he was treasurer, was quite transparent about wanting to push this line. If these provisions are well received, I see no reason why this, without trying to politicise the tax measure, if re elected, I see no reason why he wouldn't push to put this in place in the next election. Then there's some tricky bits there in terms of transition from one to another and how long stamp duty will continue to operate. And that's where things start to get a bit more inefficient or a little bit messy when you're running parallel systems, so that's going to be the challenge for a period of time. So there'll be questions around how the parallel systems run, when the stamp duty drop off completely, so that this thing is not optional and it just it's a compulsory move into it. So there'll be there'll be a lot to talk about moving forward. But best guess would be some time after the election during the next term of Parliament.

Steven Paterson

That's a great point, Vince, because while I think the move to start the next step will be relatively short, even the projections of the New South Wales government on what has been proposed, it will take 20 years for half the property in New South Wales to enter the new system. And more like 50 years for stamp duty to drop off completely. And the reason for such a long transition is again to overcome the emotional response, as well as not to be creating too many losers. And the government's, I suppose, answer to that is to have an extremely long transition period. Compare that to the ACT is actually already halfway through their 20 year transition period, so but there's will only be 20 years, so that's the biggest dilemma I think governments will have is not to be creating too many losers along the way.

Rebecca Archer

Just given those timings, it strikes me that perhaps this is something that should have been tackled well before now. Is reform on stamp duty long overdue?

Steven Paterson

Oh, absolutely. The last time that this came up was the introduction of the GST. And the states and territories all agreed to abolish a whole raft of stamp duties, which they largely have done, except land. So that was seen at the time to be just too big a leap. But it certainly has been discussed. Again, It's this emotional connection to the Australians generally have to the home, and how it's taxed is one that's been, I think, the hardest to overcome.

Vince Tropiano

I think Rebecca, the answer to your question is reform on pretty much any area of tax is long overdue. It seems to be a common conversation that there's so many areas that need to be looked at and reworked. And as Steve said stamp duty is certainly one of them. But there hasn't been anything like this since the GST days. But certainly this is an area that does need to be looked at and it's become more and more painful as property prices have increased. So it's a positive that that's being looked at this point in time.

Rebecca Archer

It is interesting. I know that before Covid hit, there was a lot of talk about things like the company tax rate, you know, and whether that needs examining, and it just completely fell off the cliff because we had other priorities to deal with. I think it's going to be very interesting to see whether this reform that's been announced in New South Wales is a bit like the canary in the coal mine, where you'll start to see other things falling as well from here and governments looking at, well, let's get back to that agenda that we had before we had this global pandemic on our plates.

Vince Tropiano

I think the challenge with that and that's right, that would probably ideal. But I think the challenge we have is recovering from the last couple of years. Both state and federal governments need to pay the bills in terms of some of the expenditure over the last few years, so getting into reform which might in itself lead to reduction in tax revenue is going to be a bit challenging at this point in time. Having said that, we still need to work to make a more efficient system to encourage business as much as anything.

Rebecca Archer

Well, Vince and Steve, thank you so much for your time today and your expertise on this issue. I wonder if people are looking to contact you. What's the best way for them to get in touch?

Steven Paterson

For me, certainly LinkedIn in is a great way when anything comes up in terms of a change or things that I know they're going to be material or interesting for people. I make sure that that's all posted on LinkedIn. So a connection on that will get that immediately, but also just contacting us through the firm. We also work equally.

Vince Tropiano

I think that's right, LinkedIn or contact details through Grant Thornton through the website as well. We're not hard to find.

Rebecca Archer

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