ABOLISH LAND TAX AGGREGATION RULES

THE ISSUE: Current land tax aggregation rules discourage investment in the WA property market.

FACTS:

• In the 2016-17 State budget, the WA State Government collected $896 million in land tax revenue.

• The Economic Regulation Authority (ERA) estimated the average land valuation (unimproved value) in WA to be $384,708.

• On an unimproved value of $384,708, WA property investors pay the third highest amount of tax in the nation.

• Land tax rates have increased for three consecutive years from 2013-14 to 2015-16

• The Treasurer, the Hon Dr Mike Nahan MLA, in his 2016-17 Budget Speech said “…we will examine options to reduce the financial impacts [of land tax] on property owners going forward, including the impacts of aggregation.”

WHY: Aggregation rules unfairly penalise investors for owning multiple properties, as investors are taxed on the total (aggregated) unimproved value of their land holdings. The situation is worsened if an investor owns highly valued land holdings, as they are assessed at higher rates and thresholds. This impacts the property market by softening buying activity levels and increasing the number of dwellings on the market, as holding property becomes less attractive compared to other assets.

ANALYSIS: 

Table 1: Example of the impact of aggregation on residential land holdings.

In this simple example, it is clear that aggregation rules inflate the amount of tax collected on an investment portfolio.

In Table 1, the investors’ land tax bill is almost two times larger than the amount payable if the property holdings were not aggregated. The removal of land tax aggregation rules will stimulate activity in the residential and commercial markets as holding property becomes more attractive.

Table 2 outlines scenario analysis of the increases in sales volumes for both residential and commercial property markets as a result of this reform. It estimates the impact on the State budget. To determine the loss of land tax revenue from the policy reform, the proportion of residential and commercial transactions that are aggregated is weighted. It is assumed that five per cent is residential and 15 per cent is commercial, therefore the state would lose $168,700,000.

Table 2: Scenario analysis for market stimulus.

ASSUMPTIONS:

• That 10 per cent of residential investors own more than two properties for the purpose of aggregation.

• Average land valuation (unimproved value) of $384,708.

• Current land tax rates.

• It is assumed that 50 per cent of land tax revenue is generated from residential transactions, whilst 50 per cent is from commercial transactions.

• 70 per cent of commercial investors hold one property to the estimated unimproved value of $2 million.

• 60 per cent site coverage on an average commercial transaction, therefore 40 per cent for unimproved land value ($800,000).

• Based on the ABS Census data from 1996 – 2011, there was three per cent annual average growth in the number of investment properties in the private rental market.

• Projected population growth is estimated at 1.6 per cent. It is assumed that one in four households of the population growth will buy an investment property if aggregation rules are removed.

• It is assumed that 10% of residential land tax revenue is aggregated and 30% of all commercial land tax revenue is aggregated.

ACTION: REIWA is calling on all political leaders to commit to removing land tax aggregation rules in the 2017 State Election.


Article by: REIWA / In Your Corner – 2017 State Election

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