Land Tax (Miscellaneous) Amendment Bill

November 27, 2019

The Hon. J.A. DARLEY (11:03): For decades, South Australia has had the most uncompetitive land tax system in the country. As many would know, it is largely due to land tax that I entered this place. I find it ironic that, over 10 years later, I am standing here talking about the same thing. Back in 2007, when I came into this place, one of the major problems was the scale of rates. If I remember correctly, the scale of rates had not changed for about 20 years and, in that time, property prices had shot through the roof. Land tax bills that had been a few hundred dollars very quickly inflated to thousands of dollars over the course of a few years.

 

We do not have quite the same situation now, as the scale of rates were adjusted in 2009-10 and indexed annually to keep up with changes in property values. However, our scale of rates is still uncompetitive when compared with those of other states.

 

The government has tried to address this by making a number of changes to the scale of rates. It has now increased the bottom threshold, reduced the tax rates for certain thresholds and increased the top threshold. These changes are very positive and I am completely supportive of these amendments. These changes will benefit many land tax payers; however, for many, the benefit they would receive from a lower scale of rates is negated when coupled with aggregation as outlined in the bill.

 

When I entered this place at the end of 2007 the then Labor government had amended the Land Tax Act to allow the commissioner to disregard minority interests in a property; that is to say, if someone had an interest of less than 50 per cent, the commissioner could disregard the minor interest and aggregate the property's value with the holdings of the person with a majority interest. This move caused stress and anxiety to many people because they had structured their property holdings in such a way as to minimise land tax. These people were not breaking the law; they simply had a look at the rules and played within them.

 

Now, 10 years later, we face a similar debate. This bill will expand aggregation to a model which will be similar to what they have in New South Wales and Victoria. Property holdings of associated companies will be aggregated. It is worthwhile noting that the other states also have aggregated ownership for land tax purposes. All interests that individuals hold in properties will be aggregated together, along with any other interests they hold as a beneficiary of a trust.

 

This is, of course, a simplified explanation of these changes, as the specific details are much more complex than this. This is perhaps one of the biggest problems the government had in selling their land tax reform. Land tax is complex in nature, which has made it very difficult for people to understand what effect amendments will have on them. I have been contacted by many constituents who think they will be worse off; however, when my office has sat down with them and examined their holdings it turns out that they will benefit from the changes. This is true even of the major stakeholders that I have consulted with who have been very outspoken opponents of the package. Understanding of the details was outdated, and it seems that inadvertently a lot of incorrect information has been circulated in this debate.

 

On the other hand, I have spoken to many constituents who have fared worse under the changes. These constituents have often spent hundreds or even thousands of dollars on specialist taxation accountants and lawyers to determine the effect of these changes. In many cases their accounts have also been calculated by my office to confirm the outcome.

 

At this point, I want to say a special thanks to Dejana Graziano in my office for having dealt with the barrage of constituents who have contacted me. I am always very grateful to people for making the time to contact me but, as we all know, we cannot do this job alone, and Dejana has worked tirelessly to assist constituents with their inquiries. Dejana is not a taxation specialist and I think the difficult job she has had over the past few weeks needs to be acknowledged.

 

Getting back to the subject of land tax, the government has argued that the aggregation proposed in this bill is to address inequity—that if two people hold $1 million in property holdings then they should be paying the same amount of land tax, regardless of how these properties are held. However, in delivering this message the government has, whether intentionally or not, made many ratepayers feel like criminals. They have been accused of exploiting a loophole in the legislation. This is unfair. These people merely structured their holdings as they are allowed to do under the law. Much like those who had created minority interests prior to 2007, they looked at the rules and they played within them.

 

The government is now changing the manner in which the tax is calculated, which is something it is allowed to do. It is not saying that people are unable to hold their properties in different legal structures; however, what it is going to do is change the manner in which the tax will be calculated. In an ideal world, aggregation would have been considered when land tax was initially introduced in South Australia in 1936. If introduced at the beginning, aggregation would not have had as big an impact on people, as they would have made different decisions based on those rules. From what I understand, this is what they did in New South Wales and, as such, they have never gone through this headache of having to unscramble the egg.

 

It is interesting to note that the original 1936 act was much stricter in who paid land tax. The only land that was exempt was Crown land, parklands, public roads, public cemeteries, public reserves, hospitals, land used solely for religious or charitable purposes, public libraries, museums and art galleries. Land tax was charged at the rate of three farthings for every pound on the unimproved value of the land. If the value of the land was over £5,000, a further three farthings per pound was applied. Absentee owners paid an additional 20 per cent and there was a minimum amount of one shilling per property.

 

My biggest issue with this bill was the effect aggregation would have. Whilst I recognise that there was inequity amongst those who paid land tax, I also recognise the changes as being proposed would have a very significant impact on many people. People have not done the wrong thing; they have merely worked within the existing rules. Of most concern to me was those taxpayers who had accumulated modest property holdings over a lifetime in order to have some financial security in their later years. I am mainly talking about those who emigrated to Australia after the two world wars and invested in property as their form of superannuation. Property holdings were often split across couples and the family in order to minimise tax.

 

As I see it, the introduction of this aggregation hurts these mum-and-dad investors the most. Their property portfolios usually consist of about half a dozen low-value properties which are rented out to low-income tenants. By doing this, they are providing a service by offering low rent properties for many who cannot get into the public or community housing. They know that they cannot pass this cost on to their tenants as their tenants will simply be unable to afford rental increases.

 

I have spoken to many constituents in this position who are fearful about the changes. They are worried that they will have to abandon what they have worked so hard for. They have advised that they will have to sell their properties as they simply will not be able to afford land tax under this bill. They have advised that they will move and invest interstate or they will stay in South Australia and will apply to receive the pension.

 

This is in stark contrast to their personal ethics of wanting to provide for themselves in old age rather than being a burden on the public purse. However, when their land tax was calculated against the new tax scale of rates, over half found that their land tax actually decreased. I want to make the point that these are people who were fundamentally opposed to the reforms. I understand the modelling undertaken by Treasury has estimated that the vast majority of those who pay land tax will be better off under the changes. There was also concern that if these owners are forced to sell as they cannot afford to pay the land tax, these tenants would be forced to find alternative accommodation.

 

South Australia already has a rental crisis with many finding it difficult to find an affordable rental property, especially given the length of public housing waiting lists. There are serious concerns that this will contribute to homelessness in the state; however, if the vast majority of landlords who pay land tax will experience a reduction in land tax then there would be no reason for them to put the rents up. It will be interesting to see if anyone experiences a decrease in their rent because their landlord has received a reduction in their land tax.

 

In discussions with the Master Builders Association, the Housing Industry Association and developers, they have indicated that new building construction has largely stopped due to the uncertainty surrounding land tax. Similarly, the Real Estate Institute of South Australia has provided information that investors are not purchasing properties due to the uncertainty around land tax. It warned that the market may be flooded with properties that are being sold because people cannot afford to pay the land tax. Others who expressed concern about this advised that there would no longer be investment, especially in the lower end of the residential market in South Australia.

 

However, the lessons learnt from interstate do not support these scenarios. Victoria changed their land tax rules with regard to aggregation in 2005. There is still investment in lower end residential properties in Victoria, and South Australia did not experience a boom in interstate investment because of our dis-aggregated land tax rules.

 

The response to this is that property in South Australia does not have the capital growth that Victoria's does, that is to say that the capital growth of property experienced in Victoria offsets the negatives of land tax. Without fail, every stakeholder or constituent who has made this point to me has said that South Australia does not have the population to push capital growth and it is for this reason that these reforms are necessary.

 

South Australia's top land tax rate of 3.7 per cent has been a disincentive for the top end of town to invest here. If big businesses and companies are incentivised to come to South Australia, this brings jobs. Jobs bring people and these people need somewhere to live. Some may choose to buy in South Australia and others will rent, but undoubtedly there will be a trickle-down effect of attracting big investment to South Australia.

 

There are many landowners who will benefit from these changes. These landowners have not spread their property holdings over multiple ownerships, but instead have them in a single ownership. These people will benefit from the changes in the threshold and the lowering of the rates. As I have said before, I have spoken to quite a few constituents who were surprised to learn that they would actually be better off under these changes.

 

I have also been contacted by several business investors who will benefit from the changes in the threshold. Whilst it is easy to dismiss these submissions because they are from the 'richies' and many feel that these people should not be the ones who benefit from the tax reform, it is these people who fund developments and investment that create employment and therefore attract people to come to South Australia.

 

The changes made to the scale of rates in this bill are undoubtedly better, but when coupled with aggregation it is very difficult to support the proposal. I have been working with the government to try to find a compromise and thank the government for assisting with information requests and making themselves available.

 

A few weeks ago, I approached the government with an alternative scale of rates, which had the support of almost all stakeholders I consulted with. It was more in line with the scale of rates in Victoria and New South Wales; however, without access to land tax data, it was not known what the revenue impact would be. The government ran the numbers and came back to me advising that the revenue impact would be too great.

 

I understood this and thought that it would present an alternative scale of rates; however, it did not do this. It came back with a number of measures to address affordable housing. Whilst it is good that the government is thinking about ways to improve affordable housing, it did not address the issue of the land tax and in particular the effect aggregation will have on a particular cohort of people.

 

In the spirit of compromise, I suggested to the government another alternative to help soften the blow of aggregation, which would involve capping land tax increases over a number of years. Capping increases would also address the issue of the revaluation initiative, which could see values increase dramatically.

 

In combination with this, I suggested a flat land tax of $1.95 for all income-producing properties that would be subject to land tax if the site value was under the land tax threshold; that is to say, that is only because the site value is below the threshold that there is no land tax payable. Exemptions for principal place of residence, primary production and so forth would still stand. Even though this was a measure which would not have had a negative impact on the budget, the government did not agree to this, even though, again, it had the support of all stakeholders that I consulted with.

 

To try to address my concerns about aggregation, the government suggested a one-off $10 million transition fund to offer a subsidy to those who would be worst affected by the aggregation measures. I commend the government for this suggestion and note that it is more than what the Labor government did when they introduced aggregation of minority interests in 2007. The transition fund was a good start, but more needed to be done to help those at the bottom end who would be most severely affected.

 

As I said, I have spoken to constituents who will still have to find a significant amount of money even if they were to receive a substantial subsidy for the first year. This in itself highlights another problem: that there are people who have structured their holdings in a way that they are not paying the same amount of land tax as others who are holding their properties in another way. Even though both parties own the same amount of property, they are paying different amounts of tax. This is the inequity that the government is trying to address.

 

The contentious issue of the bill obviously comes down to aggregation. However, the problem we face is that we are trying to amend an existing land tax system rather than starting afresh. If starting afresh, then these measures would not have as big an impact. If we had the opportunity to rewrite the Land Tax Act at the beginning, then it would be very different with the benefit of hindsight. Given that the government was unwilling to negotiate on removing aggregation, it was clear that measures needed to be put in place to offset the effect of aggregation.

 

Over the past few months, the government has changed its position considerably. The most notable was when a compromise was reached with the Property Council which inserted an additional threshold between $1.098 million and $1.35 million at a rate of 2 per cent. This threshold would increase to $1.6 million in 2022-23. Again, this was a move in the right direction and was successful in gaining the support of one of the biggest critics of the plan; however, it was widely panned as a backflip and only benefited the big end of town.

 

The Property Council has received harsh criticism for changing its position, but I think it should actually be applauded in its approach. Whilst I did not think that the package it negotiated was good enough to win my support, I applaud the manner in which it approached the issue. With any decision, a position should be decided based on the facts and offer at the time. If what is laid on the table changes, it is imperative that consideration is given to see if the new proposal is good enough to support or if it is better to go back to the original position. To blindly refuse to consider any new proposal and continue to oppose it based on principle shows a stubbornness that could result in failure to support a better package.

 

Similarly, Business SA has received criticism for saying that it would support the package if there were further changes made to the scale of rates. I commend Business SA for the approach it has taken on this issue in considering what would be acceptable in order to offset the impact of aggregation for its members.

 

I would like to note at this point that these changes and negotiations should have been made prior to the budget announcement and introduction of the bill. The manner in which this has been handled has been perhaps the best demonstration I have seen in over a decade in this place of how not to do it. Time in which to consider complex changes has been very short, which has put an immense amount of pressure on any party, including stakeholders, their members, as well those who have to determine the effect of each iteration of the bill. I believe it is largely because of this that has led to the blind opposition to the proposal. The entire process has been mismanaged and the government should learn from this terrible experience.

 

I know there are some who have suggested that the package should be opposed based on this alone. However, it would be very obstinate of me to reject what could be something good for the state because I have issues with the procedure. The government wants to create a fairer, more competitive land tax system, but does this bill achieve this?

 

In considering this issue, I had to determine whether South Australia would be better with the government proposal, which is far from perfect but would help the majority of land tax payers, or go back to the status quo, which is equally flawed and has inequities. I wholeheartedly acknowledge that there are some mum-and-dad investors who will be worse off under this package, and it was on those that I focused my attention.

 

The government's current package will lower the rate for the second tier from 1.65 per cent to 1.25 per cent next year. This rate will be further reduced in the following years to 1 per cent. This will mean that those with total site values between $755,000 and $1.098 million will pay tax at a 1 per cent rate, a significant improvement from 1.65. This change not only assists those within this tax bracket but it will also help those who have more holdings as the effect of any tax rate at the bottom flows up and results in reductions for bigger holdings as well.

 

The new proposal will also increase the top threshold from $1.35 million in 2021 to $2 million the following year. I specifically asked for this because I acknowledge that it does not take much to have over $1.35 million in property holdings where you would be subject to the highest tax rate. It is important to note that the highest tax rate has also been reduced significantly from 3.7 per cent to 2.4 per cent which will help attract investment to South Australia.

 

But all of this was still not enough. As previously mentioned, the government offered a one-off transition package, which would give those affected by aggregation a one-off discount on their land tax of up to 50 per cent. Whilst this was a good start, it still was not enough to help those hardest hit. I went back to the government and am pleased that they have agreed to a bigger transition package which would step in the increase over the course of three years.

 

There are also other concessions the government has given but it is essentially the three mentioned above that have managed to secure my support for the bill. From when this started at the budget announcement, there has been a significant change to the original package. The rates and thresholds have changed so significantly that I believe it is a more equitable system. For those who will be affected and who are least likely to afford it, there is a transition package to assist them.

 

I do not for a second think that this system is perfect. There are still issues that need consideration. The Master Builders Association and the Housing Industry Association have raised the issue of being taxed on the tools of their business, which is land. They have called for a tax concession for trading stock; that is, land they need to hold in order for them to undertake their work. I am very sympathetic to this and urge the government to consider a scheme similar to Queensland's where a concession of 40 per cent is given to subdivisions.

 

In the end, I could not ignore the fact that the vast majority of land tax payers, consisting predominantly of mum-and-dad investors, would be better off under this plan. I am satisfied of this, based not solely on the information provided by the government, but rather from my own conversations with constituents whose land tax I compared to the existing scheme and the new scheme. In most cases, these calculations were done on constituents who had contacted me who were rigidly in opposition to the changes but changed their mind once it was demonstrated that they would be better off.

 

I know that there will be people who will be worse off. They have been very vocal in speaking to me and contacting my office. This has been a very difficult decision for me and I have listened openly to everyone who has contacted me. On balance, I believe these changes will be better overall, not only for the majority of individual land tax payers who will pay less but also for the state's economy overall. With that, I commend the bill to the house.

 

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