On 11 February 2015 the South Australian Government released a discussion paper prompting a review to reform South Australia’s taxation system. This Discussion Paper sets out key principles for state reform, considers the South Australian tax system, compares the tax, royalty and business costs of other states and provides a number of discussion options for tax reform. Interested parties are invited to make a written submission to the State Tax Review by 11 April 2015. Special Counsel, Will Fennell and Associate, Adam Rinaldi outline the review.
Tax reform objectives
The Government’s objectives in its reform agenda are that South Australia’s tax system:
- provide sufficient revenue to deliver high quality services and infrastructure to the community
- support entrepreneurship, investment and job creation
- is fair and has regard to people’s ability to pay
- collects revenue efficiently
- is stable and predictable.
Proposed Reforms - Conveyance Duty
Subsequent to some limited exceptions, conveyance duty applies to the transfer of most residential, commercial and industrial property in South Australia. It also applies to a wide range of other types of dutiable property including goodwill and intellectual property. The amount of conveyance duty payable directly correlates to the market value of a property.
The Government has identified in the Discussion Paper that conveyance duty is one of the least efficient taxes levied by the State (accountable for around 22 per cent of total tax revenue) and is highly volatile (annual growth has ranged from 20 per cent to 42 per cent). Conveyance duty has been criticised as being “inefficient” because it may reduce the number of property transactions.
The Government has raised the idea of the conveyance duty being abolished and replaced with a broad-based annual property tax. In this regard, the Government is interested in hearing views on whether:
- conveyance duty is a barrier to business expansion and investment decisions
- reducing or eliminating conveyance duty on property transactions would benefit those seeking to purchase a property, including if property owners were required to pay an annual property tax, or whether it may result in more transactions which could push up property prices and undermine the benefits of any changes to conveyance duty.
Proposed Reforms – Land Tax
Land tax is levied on all land in South Australia, although a number of exceptions exist, including land occupied by an owner which comprises the owner’s principal residence. Generally, commercial and industrial properties are subject to land tax.
Presently, South Australia does not rely heavily upon land tax noting that private land tax presently represents 8% of total South Australian tax revenues. However, the Government is mindful that any move to broaden the land tax base or to change the way that land tax is levied may result in significant distributional impacts on the South Australian community.
One of the land tax issues identified in the Discussion Paper is aggregation. Land tax is applied on the basis of the total land holdings of the person or business that owns land, rather than each individual property. Aggregating land holdings aims to ensure that land holders are treated equally where they have total land holdings of equal value. It is suggested that aggregation may actually act as an impediment to large scale institutional investment in residential rental housing.
Some reform options specified in the Discussions Paper to address some of the concerns raised with aggregation include:
- Abolishing aggregation – this would simplify the land tax system. However, it would result in owners of multiple lower value land parcels paying a lower overall effective rate than an owner of a higher valued property despite the value of both ownerships being of equal value.
- Reforming aggregation to adopt an approach similar to New South Wales, Victoria and Queensland – in these states, land tends to be aggregated based on an individual’s total interest in land rather than at ownership level. A reform of this nature has been stated by the Government as likely to raise more tax revenue providing scope to fund other tax reform or revising the land tax scales.
- Introducing a flat rate of land tax with no (or a very low) tax-free threshold – the paper asserts that the impact of a flat land tax rate would be to increase the number of ownerships liable for land tax, increase land tax payable on lower value properties/ownerships and significantly decrease the land tax payable on high value properties/ownerships.
- Levy land tax based on the square metre value of land as opposed to an entity’s aggregate land holdings – the paper assets that the moving to land tax on this basis will mean proportionally more land tax will be paid on land located in or around the Adelaide central business district and other areas of the State where land values are high. Land that has a lower square metre value may pay less land tax.
There have also been a number of other reforms proposed for land tax:
- The introduction of a broad based property tax to replace the conveyance duty. The broad based property tax is proposed to include the principal place of residence. This will mean that people will no longer pay a large tax amount when they purchase a new property but will instead be required to pay an annual property tax. The Government estimates that if an annual charge was introduced on all properties to replace conveyance duty, the charge based on a median valued home (i.e. $410,000) could be around $1,200 per annum (depending on the approach taken to raise the required revenue).
- Changes to the existing land tax rates and scales focussing on a reduction in the top marginal land tax rate of 3.7 per cent.
Anyone with an interest is welcome to make a submission in response to the proposed options of tax reform raised in the Discussion Paper. Interested parties are invited to make submissions to the State Tax Review by 10 April 2015.
A copy of the Discussion Paper and further information with respect to the submission process can be found here.