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Property owners have become an easy target for state governments to raise revenue, but experts warn the measures will hurt tenants and distort the market.
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NSW seizes ‘low-hanging fruit’ with new land tax slugs
18 June 2024
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The decision to freeze the tax-free threshold on land tax and hike foreign investor duties in NSW shows how land has become the “low-hanging fruit” of governments to conveniently raise revenue, experts say.
They say the changes coming to multiple property owners and overseas home buyers in NSW, announced ahead of the state budget over the weekend, follow a pattern of increased land taxes in Victoria and Queensland, distorting investment decisions and leading to costs being passed onto tenants.
The decision means that from 2025 the tax-free threshold will remain at its current level of $1.075 million, subject to periodic review, and will no longer be increased to account for indexation.
The government will also lift the foreign purchaser surcharge from 8 to 9 per cent, and the foreign owner land tax surcharge from 4 to 5 per cent.
HLB Mann Judd tax partner Peter Bembrick said land had become the “low-hanging fruit” of revenue-raising measures.
“It’s a major trend we’re seeing and not much of a surprise with how much pressure the budget is under,” he said.
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“Land has been a pretty common target for governments whether it’s from duties or from land tax, and targeting foreign investors in land is the probably the lowest-hanging fruit of all.”
Treasurer Daniel Mookhey said in a statement that he expected the measures would bring in $1.68 billion over the next four years to address the state’s housing crisis.
“These are modest adjustments against the backdrop of a generational housing crisis,” the Treasurer said.
“The government has been upfront with the people of NSW. We intend to pull every lever we can to confront the housing crisis and build the homes the people of NSW need.”
But William Buck tax director Nick Gangemi criticised the government’s approach.
He said that while the land tax was originally designed to prevent people from amassing “huge property portfolios”, as property prices have risen in recent years, more and more people were crossing the tax-free threshold.
“With property prices so high, it’s quite easy to fall over the threshold and find yourself subject to very large land tax increases,” he said.
It meant those who might have a limited ability to pay – such as those with higher-value land but lower cash reserves – would be hit with new liabilities on top of already elevated costs, made worse by higher interest rates.
Not only would this cause rents to increase as residential and commercial landlords pass on their costs to tenants, but it also distorted the property market as a narrowly targeted tax.
“You should tax people based on their ability to pay. Land tax is difficult … what it’s doing is using this concept of property as a proxy to say, ‘if you’ve got property, you must have the ability to pay more taxes’, which is not necessarily the case,” he said.
“So that changes the market and instead of having people do the normal economic analysis to decide on whether to invest, maintain or buy property, it creates anomalies,” he said, forcing people to rethink their ownership of property or passing additional costs onto commercial and residential tenants.
Broad-based taxes like income tax or GST that apply progressively would be more appropriate revenue-raising levers, Gangemi said.
“There are other ways that the governments can increase in order to get better funding. But it’s sort of limited due to politics,” he said.
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