15 May 2018
The Hon. J.A. DARLEY (15:49): I seek leave to make a brief explanation before asking the Treasurer a question regarding land tax.
The Hon. J.A. DARLEY: I understand the government intends to reduce the top land tax rate and to raise the threshold before land tax becomes payable. In a recent example that I became aware of involving a small business property, the site value of the land increased by 16 per cent, but the resultant land tax account increased by 21 per cent. Had the property moved to the next tax rate range, the increase in land tax would have been significantly higher. My question to the Treasurer is: will the government consider capping total land tax receipts at CPI or capping individual land tax increases for any ownership at CPI, and if not, why not?
The Hon. R.I. LUCAS (Treasurer) (15:50): I thank the honourable member for his question, and in doing so acknowledge his many years of campaigning for land tax reform. Perhaps my first contact with the honourable member was before he was an honourable member and a member of the Land Tax Reform—
The Hon. S.G. Wade: He was honourable.
The Hon. R.I. LUCAS: He was honourable, but he wasn't an honourable member at that stage—Land Tax Reform Association meetings of many hundreds of people in the north-eastern suburbs, in and around the Payneham and Glynde area and in the Norwood area and others. He, at that time, was associated with another former prominent member of parliament and members of the Liberal Party who were part of that campaign as well.
The honourable member has raised those issues with me obliquely in the past. I will certainly bring back a more detailed response to the honourable member's question. The problem with the first of the options that the honourable member has identified, that is, capping land tax at the CPI or some other indexation rate, is that there are some significant challenges and issues. As the honourable member would understand, land tax is pitched and set on 30 June of any particular year, and the estimates of Treasury are not always 100 per cent accurate in terms of what the land tax collections will be for the following 12 months. They do an estimate that is included in the budget, which may or may not be above the CPI level.
The issue would be, if you were to cap it at the CPI, do you cap it at the CPI at the start of the year, and if you do, how would you then apply that to the individual categories and properties within the various classifications? If you have set a 2 per cent cap, or something, in terms of total land tax collections, how would you allocate that between a small property and the land tax payable by the biggest commercial property owner, who might have tens or hundreds of millions of dollars of properties, paying land tax on that? Do you cap it at 2 per cent for everybody? What do you do if, at the end of that financial year, you haven't actually collected more than the capped rate?
More problematically, if, for example, the estimate was that there would be less than a 2 per cent increase in the total land tax collections for the year, but because of changes through the year you ended up collecting 10 per cent higher land tax collections for that particular year, would the government then be required to rebate in some way, and if you did that, how would you actually do it?
I think there are some practical questions with the first option, which I have discussed with the honourable member in years gone by, in terms of how that would actually be applied. I will take some advice on that and bring back a reply in relation to the practical questions, and I am happy to engage in further discussion with the honourable member on that.
The second one I will need to take a little bit more advice on, and that is in relation to CPI for individual land tax payers. The first issue I would raise there is that there are, again, some issues that would need to be considered before you went down that particular path. I am thinking of an example where you go above a particular threshold, let's say $1 million dollars. In a particular year, a land tax payer's property was worth just under $1 million and there was a 20 per cent increase in valuations in that year because it was a time of huge valuation increases and his or her property was capped at a 2 per cent CPI increase.
So, their property might have been worth just under $1 million and is now worth $1.1 million or $1.2 million, but they have had their land tax capped at 2 per cent, and yet the person who already has a property at $1.1 million somewhere else in the state and hasn't experienced a huge increase in valuations is paying land tax at the old rate, which hasn't been CPI capped. So, you might actually have two land tax payers with property of exactly the same value but, depending on when the property valuation increases occurred, one of them might be paying a higher land tax rate than the other, even though they had property of exactly the same value.
I think these are the sorts of issues you would need to consider. I am happy to take some further advice and bring back a slightly more detailed reply for the member but, more importantly, I think, I am more than happy to sit down, as I have over the years, and engage in earnest and fruitful discussion with the honourable member about potential areas of land tax reform. I didn't get a chance, and I won't delay the house any further, but we do have a comprehensive land tax reform policy. The honourable member has, in brief, outlined that. Perhaps, on another occasion, if I am asked another question, I will expand in greater detail on the Marshall Liberal government's reform proposals for land tax.
Answer to Question
3 July 2018
The Hon. R.I. LUCAS (Treasurer): Growth in land tax revenue in a financial year is impacted by various factors. These factors include growth in site values as estimated by the Valuer-General, land tax threshold indexation (based on average growth in site values as determined by the Valuer-General) and changes in the composition of the underlying land tax base.
If it is estimated that total land tax revenue growth will exceed estimated CPI growth in an upcoming financial year and a decision is made to cap revenue growth at that estimated CPI level, this would imply that land tax bills, on average, could only increase by a maximum of CPI growth.
This could be achieved by adjusting land tax rates and thresholds or capping all land tax bills at the estimated CPI growth rate. Each option would result in different distributional effects among taxpayers and could necessitate an adjustment for taxpayers following the end of the financial year to reflect actual experience (e.g. actual site value and CPI growth in the financial year).
If total collections are capped at CPI, then when total land tax collections are forecast to increase by more than CPI in the coming year, rates and thresholds would need to be adjusted to ensure estimated collections did not exceed the cap. This would require a judgement to be made about which rates or thresholds would be adjusted. These adjustments would assist in limiting overall collections but would not avoid the potential for the land tax liability of individual ownership to increase by more than CPI.
Alternatively, a decision to cap the growth in individual land tax liabilities at CPI would result in inconsistent treatment between landowners and equity issues. Land tax has a progressive rate structure, meaning that larger landholdings pay more tax than smaller ones. A cap would erode the application of a progressive rate structure as the tax treatment between taxpayers would become inconsistent.
If the site value of an ownership increased by more than CPI due to an improvement in the value of the land within the ownership or a change in the composition of the ownership (e.g. an increase in the number of properties), this ownership would be liable for less tax compared to another ownership with the same site value that did not benefit from the same appreciation in its landholdings.
For example, under a CPI capping policy, an ownership that experienced an increase in its site value from $1 million to $1.1 million between 2016-17 and 2017-18 would have received a land tax bill that was capped at $8,865 in 2017-18 (assuming a 2% CPI cap). In comparison, an ownership with a site value of $1.1 million in 2017-18 that did not experience any site value appreciation from the previous year would have received a land tax bill of $10,137.
A scheme which caps growth in liabilities at CPI would therefore provide the greatest benefit to those landholders that experience high levels of site value appreciation above CPI growth. However, due to the large differences in liabilities that could occur for ownerships with the same site value, this could be perceived as effectively penalising landholders who experience little or no site value appreciation.
To minimise the impact of bracket creep, land tax thresholds in South Australia are currently indexed in line with average growth in site values as determined by the Valuer-General. This works to offset the impact of bracket creep where ownerships move in line average property values.
The Liberal government has also committed to cutting land tax bills. From 1 July 2020, the tax-free threshold will be increased to $450,000, up from the current threshold of $353,000 applicable in 2017-18. This will mean that thousands of land tax ownerships will no longer be liable for land tax. It will also provide an ongoing reduction in land tax for all other ownerships that remain liable for tax. The government has also committed to cutting the land tax rate from 3.7 per cent to 2.9 per cent for ownerships valued from just over $1 million up to $5 million.