Tax Reform – Talk Needs to Become Action 5

Tuesday, April 7th, 2015
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Last week saw the release of the Federal Government’s Tax discussion paper, Re:think.

This marks the first stage of the Federal Government’s Taxation White Paper process.

Re:think is a very wide-ranging document of over 200 pages, which poses a number of discussion questions for parties to respond to. Formal submissions are due by June 1 this year.

The tax paper is impressive in its scope and notes at the outset that in considering tax reform options, the government will ‘rule nothing in or out.’ The Treasurer reiterated this line in media interviews following the release of the paper. That is a commendable starting point.

The report references the previous Henry Review of taxation on numerous occasions, but is distinct from this most recent tax review (2010) because GST is included in the scope. Consideration of the GST was explicitly left out of the terms of reference for the Henry Review. Some would justifiably argue that it has already been removed from this latest discussion as well!

Taxation reform as it relates to Australia’s residential construction industry is crucial to a successful reform agenda. It can be demonstrated, for example, that the most inefficient tax in Australia’s entire taxation system is stamp duty on property conveyances. This is followed closely by company tax and insurance taxes.

Independent research HIA commissioned from the Centre for International Economics (CIE) demonstrated that in absolute terms, housing is the second largest contributor of tax to Australian governments. Among Australia’s largest industrial sectors (those sectors with a value added of more than $10 billion), the new residential building sector is the second most heavily taxed in relative terms. Last time I checked, new housing represented putting a roof over somebody’s head – shelter – an economic necessity in an advanced economy. That’s disgraceful!

Here are just a few facts:-

  • In terms of GST alone, the residential building sector accounts for 13 per cent of all GST revenue raised
  • When all taxes are included, the taxation on a new house in Sydney represents 44 per cent of the purchase price. To take a few other examples, for Melbourne the figure is 38 per cent and for Brisbane the figure is 36 per cent. Taxation on a new house is 41 per cent for Perth, 38 per cent for Albury and Adelaide, 37 per cent for Townsville, and 36 per cent for Wodonga
  • The cost for younger home buyers of financing the extra amount of a home due to taxes can equal around one third of their after-tax incomes
  • Due to the inefficiency of stamp duties alone, a mere $500 million cut to this tax would create a $738 million benefit to consumers and up to a $51 million benefit to producers. Complete removal of stamp duties would obviously have a significant benefit not just for home buyers, but to the economy as a whole

That’s an interesting final example. How the heck do you remove stamp duty, a tax that state governments are so heavily reliant on? Mind you, it is also a tax that represents a very volatile source of state government revenue and as I note above, is the most inefficient in Australia’s entire taxation system.

There is no easy answer, but the benefits would be substantial.

For instance, a reduction in inefficient taxes on housing to lower the residential cost of building by approximately one per cent would increase GDP by up to $1.3 billion a year (under less than full employment) with a flow-on impact of $3.38 of additional GDP per increased dollar of activity in residential housing.

Looking beyond outright taxation to excessive regulation, itself a form of tax, one can find even larger economic benefits.

A one per cent total factor productivity increase for residential construction (through avenues such as the removal of workplace restrictions, reductions in planning approval times, and the reform of environmental controls, building regulation and apprenticeship training) can generate a change in overall economic activity of more than $1 billion a year. This finding relates to a situation of less than full employment and the flow-on impact is $5.10 of additional GDP per increased dollar of activity in residential housing.

These are big numbers demanding big questions, and there are arguably not a great deal of alternatives. Removing negative gearing is not an alternative, by the way, so it would be constructive for the debate if all the bleating and mischievous commentary about the evils of negative gearing receded.

There are many questions to be asked and considerable debate to be had. Re:think has the potential to open the conversation – hopefully much of that potential is realised over the next 12 months.

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  1. Giancarlo Vimercati

    The TAX review will not be in the best interest of the HIGH income earners so it will fizzle into nothing and it will disappear as soon as the next election is done and dusted.
    There is no way the our PM Abbott has the B____s to review the entire TAX system, what he will do he will make the low income earners more and more and the banks richer and richer, "Dog don't eat Dog"and Idiot will always remain Idiots.

  2. David Collett

    "Removing negative gearing is not an alternative, by the way, so it would be constructive for the debate if all the bleating and mischievous commentary about the evils of negative gearing receded."

    I find the above view rather odd, given your responsibility to represent the best interests of the building industry.

    If negative gearing was phased back (all of us calling for its removal agree that it needs to be wound back over time, not abolished overnight) it would and should remain for new builds.

    If negative gearing was scaled back so that it was only available to new builds it would be a massive benefit to the whole building industry.

    Investors buying existing houses and renting them out with minimal improvements does not benefit the building industry.

    Investors buying land and building a new house to rent out or buying an existing house and doing a substantial renovation does benefit the building industry.

    • Gavin R. Putland

      +1. Builders are being sold down the drain.

  3. Vidyadhar Joshi

    I am Engineer. Economics does play role in everyone's life like it or not. Had a look at the last year's budget. Australia is A$600 billion a year economy and had A$60 billin allocated to a category "Others". and then the treasurer puts a deficit budget of 30 billion. This didnot make any sense to me.
    With such a massive economy the basic issues are still there. I am still having to pay medicare levy + private health insurance. why is private health insurance compulsaory? And then you donot get anything back from insurance. Have to depend upon car even though would not like to. Govt is pushing retirement age > 67. Have they created for jobs for this age category? What are the provisions for those who cannot work?

  4. Gavin R. Putland

    "How the heck do you remove stamp duty, a tax that state governments are so heavily reliant on?"

    By orchestrating a campaign of avoidance, so that state governments can't rely on it any more. For example, if you're a home owner, you don't need to incur a dutiable transaction in order to relocate