Proposed Changes to Victoria's Property Taxes 2021-2022 Budget
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Proposed Changes to Victoria’s Property Taxes
2021-2022 Budget
June 2021
ABOUT THE HOUSING INDUSTRY ASSOCIATION ............................................................................................................... 2
1. INTRODUCTION ........................................................................................................................................................ 1
2. DETAILED CONCERNS REGARDING PROPOSED TAX CHANGES .................................................................................. 2
3. CONCLUSION ............................................................................................................................................................ 7
Housing Industry Association contacts:
Fiona Nield
Executive Director, Victoria
Housing Industry Association
70 Jolimont Street
JOLIMONT VIC 300
Phone: 0419 751 157
Email: f.nield@hia.com.au
-i-ABOUT THE HOUSING INDUSTRY ASSOCIATION
The Housing Industry Association (HIA) is Australia’s only national industry association
representing the interests of the residential building industry.
As the voice of the residential building industry, HIA represents a membership of 60,000 across
Australia. Our members are involved in delivering more than 170,000 new homes each year
through the construction of new housing estates, detached homes, low & medium-density housing
developments, apartment buildings and completing renovations on Australia’s 9 million existing
homes.
HIA members comprise a diverse mix of companies, including volume builders delivering
thousands of new homes a year through to small and medium home builders delivering one or
more custom built homes a year. From sole traders to multi-nationals, HIA members construct over
85 per cent of the nation’s new building stock.
The residential building industry is one of Australia’s most dynamic, innovative and efficient service
industries and is a key driver of the Australian economy. The residential building industry has a
wide reach into the manufacturing, supply and retail sectors.
Contributing over $100 billion per annum and accounting for 5.8 per cent of Gross Domestic
Product, the residential building industry employs over one million people, representing tens of
thousands of small businesses and over 200,000 sub-contractors reliant on the industry for their
livelihood.
HIA exists to service the businesses it represents, lobby for the best possible business
environment for the building industry and to encourage a responsible and quality driven, affordable
residential building development industry. HIA’s mission is to:
“promote policies and provide services which enhance our members’ business practices,
products and profitability, consistent with the highest standards of professional and
commercial conduct.”
HIA develops and advocates policy on behalf of members to further advance new home building
and renovating, enabling members to provide affordable and appropriate housing to the growing
Australian population. New policy is generated through a grassroots process that starts with local
and regional committees before progressing to the National Policy Congress by which time it has
passed through almost 1,000 sets of hands.
Policy development is supported by an ongoing process of collecting and analysing data,
forecasting, and providing industry data and insights for members, the general public and on a
contract basis.
The association operates offices in 22 centres around the nation providing a wide range of
advocacy, business support services and products for members, including legal, technical,
planning, workplace health and safety and business compliance advice, along with training
services, contracts and stationary, industry awards for excellence, and member only discounts on
goods and services.
- ii -1. INTRODUCTION
The 2021-2022 Victorian Budget included the announcement of several changes to the current
property taxation arrangements for residential property in Victoria.
The changes are intended to commence at various times from 1 July 2021 onwards, with the
windfall gains tax proposed to start on 1 July 2022.
HIA understands that the proposed changes to land tax and transfer (stamp) duty are now set out
in the State Taxation Acts Further Amendment Bill 2021. It is expected that the windfall gains tax
will be subject to consultation and the details will be set out in future legislation.
The residential building and development industry was not consulted prior to the announcement of
any of the proposed changes.
HIA believes that the changes to land tax, stamp duty and the new proposed windfall gains tax will
individually and collectively have a significant negative impact on the supply of new housing for all
Victorians and hence impact housing affordability in Victoria.
Key Concerns
The proposed property tax increases will directly and indirectly increase the cost of residential
land and housing in Victoria.
Future home owners, not property developers, will bear the vast majority of the costs arising
from these new taxes.
The “windfall gains tax” will discourage or delay the sale of undeveloped land and the
development of that land for residential purposes.
Land owners and property developers will delay their plans to rezone land, subdivide land and
supply new lots to the market. This will push up the price of these new lots. These price
increases will be paid by future homebuyers. Landowners and property developers will pass
the cost forward in the price of land, rather than pass the costs back or absorb the costs in the
development process.
Because the new “windfall gains tax” is not payable until a re-zoned property is sold or
subdivided, it will operate very similarly to existing stamp duty.
HIA economic modelling, using conservative assumptions, shows the cost of a new residential
lot in Geelong would increase by around $59,000 if these taxes are applied as proposed.
Even though property developers will incur these new taxes, the costs will be borne by future
homebuyers via higher prices for new residential lots and is exacerbated by cascading taxes
on property.
Landowners, property developers and builders form a supply chain that delivers new residential
land and houses. Increasing costs in one part of the supply chain pushes up the price at the
end of the supply chain. The higher price is paid by future homebuyers.
These tax increases will make housing affordability in Victoria worse, not better, at a time when
housing supply in Victoria will already be declining.
Page 1 of 8 | Proposed changes to Victoria’s property taxes, June 20212. DETAILED CONCERNS REGARDING PROPOSED TAX CHANGES
All three tax increases will lead to an increase in the cost of new houses
The proposed changes to Victorian property tax will increase the cost of supplying new residential
lots. The impact will be most acutely felt in regional Victoria, but will also have an impact in
metropolitan Melbourne.
Tax Increase in 2021/22 Budget Impact on the supply of new
residential lots
Stamp Land with a sale price in excess of $2m incurs Increases the stamp duty the
duty more stamp duty developer pays to buy raw land
which can be developed into
Tax is now $110,000 plus 6.5 per cent of value residential lots
in excess of $2 million (up from 5.5 per cent of
value)
Land tax Land with a value in excess of $1.8 million Increases the land tax paid on land
incurs more land tax when holding land prior to being
developed and sold as residential
For land with a value between $1.8m-$3m, lots.
land tax is $9,375 plus 1.55 per cent on the
value in excess of $1.8 million (up from 1.3 per
cent)
For land with a value above $3m, land tax is
$27,975 plus 2.55 per cent on the value in
excess of $3 million (up from $ 24,975 plus
2.25 on the value above 3 million)
Value up- If the value of land outside of Melbourne GAIC Increases the cost of re-zoning
lift from re- areas increases by more than $100,000 after it land, the essential step in process
zoning is rezoned, from 65 to 50 per cent of the of supplying new residential lots.
(windfall increase will be collected as tax. This is new.
gains tax) Provides an incentive for land-
The landowner or property developer whose owners and developers delay re-
land has been re-zoned has discretion over the zoning, subdivision, etc.
timing of when he/she pays the tax. They have
the option of deferring their payment of the tax
until the property is sold or when it is
subdivided. This makes this new tax similar to
stamp duty.
Land owners and property developers will adjust their behaviour to reduce their exposure
to these taxes
Property developers with projects already underway or about to start will bear some of the costs of
these new taxes.
But in most cases, property developers will change their behaviour to seek to reduce the costs they
bear from these taxes. Crucially, because the value up-lift tax is levied when the property is
transacted or when it is subdivided, land owners and developers can reduce the extent to which
they bear the tax by choosing to change the timing of property transactions and subdivisions.
Page 2 of 8 | Proposed changes to Victoria’s property taxes, June 2021Land owners and property developers will delay their own applications to have non-urban land (agricultural, industrial and the like) rezoned and subdivided for residential purposes. This delay will result in a downstream delay to the supply of new residential lots to the market. This will increase the price of these new residential lots, given demand for housing. This price is paid by future homebuyers. In an alternative scenario, the government may re-zone land unilaterally. In this scenario, the land- owner may pay higher council rates and land-tax until they sell the property or subdivide it and sell the new lots. Even in this scenario, the landowner still benefits from delaying development. The liability for the council rates and land-tax (which arises during the delay) is likely to be much lower than the future liability for the re-zoning tax (which arises at subdivision or sale). In any case, the longer the landowner or developer delays, the more the price of residential lots is pushed up. This mechanism, where a tax on the transaction (or subdivision) of land changes the timing of sales is well established in the Australian economic literature. Many economists, going back at least to the Henry Tax Review, explain that State Government Stamp Duties (taxes on transactions) reduce the number of property transactions that proceed.1 This is not controversial: if the government reduces the incentive to transact, with taxation, one would naturally expect fewer transactions to proceed. We are making the practical point that when the Government observes “fewer transactions”, this is simply people delaying their decision to buy and sell property, until they have sufficient savings to cover the tax on transacting. In the extreme case, people could avoid stamp duty and the new windfall gains tax by choosing never to buy or develop property subject to the taxes. This is a stronger version of the argument presented above. In this case, existing landowners would simply cancel any future plans they have to sell or subdivide their land to avoid paying the new tax, and thus cancel the supply of new lots. As property development plans are delayed, and the price of land increases, the potential tax collection for the government from these particular taxes also potentially increases. Ultimately the final price, paid by the future homebuyer, rises with the return required by the developer taking account of any new government charges. Future homebuyers will bear the vast majority of these tax increases While the new taxes are levied on property developers, future homebuyers will bear the vast majority of the cost. This is driven by land owners and property developers delaying the development of residential lots, increasing the price paid by future homebuyers. Homebuyers will be bearing the vast majority of these tax increases because, ultimately, they have to live somewhere. Because housing is a necessity of life, future homebuyers will find it very difficult to avoid these taxes. They have little choice but to pay higher prices for residential lots, which are driven by land owners and property developers delaying development plans. In contrast, even where residential development projects are completely cancelled, property developers can minimise the cost they bear by redeploying their capital to other business opportunities. These new and increased taxes target regional Victoria. However, future homebuyers cannot avoid these costs by moving into the metropolitan areas of Melbourne as land supply is also constrained in these areas. The price of land will increase in metropolitan Melbourne in concert with the increases regionally. Whether the future homebuyer decides to move to regional Victoria or inner Melbourne, they will pay more for new residential land under these new taxes. Property developers 1 Australia’s Future Tax System [commonly called the “Henry Review”], Report to the Treasurer, December 2009, see: https://treasury.gov.au/sites/default/files/2019-10/afts_final_report_part_2_vol_1_consolidated.pdf, pg 254-257. The discussion on these pages explains that because stamp duty is levied on transactions, it reduces the number of transactions that proceed, citing relevant estimates. Page 3 of 8 | Proposed changes to Victoria’s property taxes, June 2021
in designated growth areas will observe the price of land increasing in other parts of the state and
will adjust their prices accordingly.
Nor can future homebuyers avoid these taxes by purchasing an existing residential property. The
stock of existing properties is fixed, or decreases as a result of demolitions. The price of existing
residential properties will increase as the price of new residential land increases, as people are
priced out of the market for new residential lots.
Future homebuyers may be able to avoid these taxes by leaving Victoria, and relocating to another
state where land is less constrained. However, this move is very costly to them, which means their
savings may be small. In this scenario all existing property owners (including ordinary households
and property developers) in Victoria may bear some cost. Victorian State Government revenue is
likely to be significantly lower than what is assumed.
The final cost borne by future homebuyers is exacerbated by cascading taxes on property
An important part of the housing supply chain is “cascading taxes”. This is taxes levied on taxes.
The new taxes announced will add to the price of a new residential lot. There will be tax
components in this price that were not there before. The property development then incurs GST to
determine the final sale price. To secure the lot, the future homebuyer must pay stamp duty on this
final price. These “taxes on taxes” are an important aspect of these tax increases that should not
be overlooked.
Applying these taxes to land for new residential lots in Geelong is estimated to add around
$59,000 to the cost of each new lot
HIA estimates that these tax increases will increase the cost of a new residential block in Geelong
by around $59,000. The vast majority of this cost will be borne by future homebuyers. Because
housing is a necessity, they have little alternative. 2
Additional costs as a result of new taxes
Unit Dec '20
Direct costs to developer
Tax on value uplift from re-zoning $ 53,973
Additional land tax during (16 months) $ 432
Cascading costs
Additional finance charge $ 796
Additional GST $ 123
Additional stamp duty paid by purchaser $ 3,319
Total 58,644
Source: HIA Economics analysis (Attachment 1)
2 Detailed methodology of HIA Economics modelling available by request.
Page 4 of 8 | Proposed changes to Victoria’s property taxes, June 2021The proposed taxes will have a broader, negative impact on the Victorian economy and government revenue There is consensus in the Australian economic literature that taxes on transactions are the most economically damaging taxes.3 Transactions are the mechanism which result in land being transferred into the ownership of the person who can put it to the best economic use. Reducing the incentive to transact, with a tax on transactions, prevents land being transferred to its best use, causing economic damage. Because the proposed windfall gains tax is payable when a property is sold (or when it is subdivided), it will have the same effect. It will prevent land being put to better use, reducing the size of the Victorian economy and lowering Victorian living standards. While the new tax may raise revenue, other taxes collected by the government may be lower, due to the smaller economy. Therefore, there may be downside risk to the Government’s revenue estimates from the tax. The taxes will commence as Victoria’s housing supply is declining Collectively, these new taxes will hit the market from 2022, at a time when detached housing starts are expected to significantly weaken, off the current high driven by HomeBuilder, increased household disposable wealth and low interest rates. HIA Actual and Forecast starts of detached houses in Victoria (‘000) 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 37 36 44 36 28 27 29 Housing is already very heavily taxed, up there with the ‘vice’ taxes applied to tobacco and alcohol. Up to 37% of the cost of a house and land package in Melbourne is due to government taxes, fees and charges like stamp duty, land tax, council rates, GST, excessive development (infrastructure) levies, red tape and government policies that restrict the supply of land. Making land more expensive will only make it harder for first home buyers to enter the market, at a time when affordability is already deteriorating, especially in the regions. HIA’s latest housing affordability data shows that Victorian housing affordability deteriorated in late 2020 and early 2021 – especially in the regions. This was driven by a surge in dwelling prices over these six months while average weekly earnings stagnated. The activity generated from residential development supports jobs and economic activity. Home building has been a rare economic bright spot for the state during the pandemic and a lifeline to many households. Housing and taxes on property already contribute up to half of the State’s revenue each year. 3 For the latest example of this literature, see Nassios et al 2019, The Economic Impact and Efficiency of State and Federal Taxes in Australia, see: https://vuir.vu.edu.au/38806/1/g-289.pdf, Table 2-1, pg 13. The table models NSW State Government taxes. The results of the table can be applied to Victorian Government taxes, which are similar. In this analysis, transfer duty on residential land scores the worst “State Economic Damage Indicator” or “Marginal excess burden”, which are similar ways of saying the tax causes the most economic harm for the revenue raised. Page 5 of 8 | Proposed changes to Victoria’s property taxes, June 2021
The windfall gains tax will place a significant impediment to future land supply and housing
affordability in Victoria
HIA is particularly concerned about the proposal to introduce the windfall gains tax on the value
uplift of land when rezoned. This single tax alone has the capacity to completely erode housing
affordability, particularly in regional areas where affordability is a major growth driver.
Noting HIA’s strong objection to the proposed windfall gains tax, should the Government pursue
this proposal further, HIA expects that there will be genuine and timely consultation on the form of
the tax including consideration of the following matters:
It is unclear whether only properties with a rezoning ‘uplift’ in value after 1 July 2022 are
affected. Capturing properties subject to a rezoning uplift prior to this date must be exempt.
Any property purchased but not rezoned prior to 1 July 2022 must also be exempt.
Rezoning decisions can take years and historical purchase feasibility by both land owners
and property developers have not considered an event such as this tax and should not be
retrospectively captured. This would include at least properties where a rezoning
application has been submitted but is yet to be determined, but should extend to properties
where commercial arrangements have been made on today’s terms and preliminary
investigations and design work for the purposes of a rezoning application is in progress.
If the tax proceeds the creation of a dedicated infrastructure fund to ensure all taxes
collected are directed to the delivery of infrastructure within and for the areas monies are
collected from is essential.
It is unclear whether rezoning of land to all zone types will be captured. Given infrastructure
potentially funded by the tax would benefit the whole community, it would be expected that
all zone changes would be included.
An agreed definition or methodology of pre-uplift property valuation must be determined for
the baseline price of land.
An agreed definition of ‘significant’ value uplift must be determined. HIA contends that
$100,000 in uplift is inappropriate and would lead to unintended consequences for small
holdings. The value should be significantly higher.
The State Revenue Office (SRO) advises “generally, the GAIC does not apply to events
involving land under 0.41 hectares”. There is nothing stated about land size exemptions
under this tax, but if the tax where to be introduced a minimum land size exemptions should
also be established.
There is no mention of exemptions for rezonings that may be administrative in nature or
made by the state government without a request from the landowner. Relevant exemptions,
such as applied between sub-categories, must be included.
HIA understands the tax does not apply to Urban Growth Zone land that has a Growth
Areas Infrastructure Contribution (GAIC) liability. Clarity should be provided regarding
whether this tax would be applied to land that becomes subject to a GAIC liability in the
future.
The windfall gains tax has the potential to drive more development back into the growth
areas of Melbourne where the windfall gains tax cannot be charged. This has the potential
to deliver a contrary outcome for land within the Plan Melbourne Policy.
Page 6 of 8 | Proposed changes to Victoria’s property taxes, June 2021 Clear direction is required regarding how the tax would be applied to land that is also
intended to be liable for Infrastructure/Development Contribution Plans (ICP/DCP) to fund
necessary infrastructure. While it is acknowledged ICPs/DCPs are collected by the local
authority, and like GAIC the windfall gain tax is a state tax, this tax would appear to risk
effectively ‘double-dipping’ to deliver the same social and community infrastructure.
There is no mention of an exemption for land that is rezoned and developed for public or
community housing. Use of land for community purposes such as the delivery of public
infrastructure should always be supported and not negated by a tax such as proposed.
The Premier of Victoria web site on 15 May 2021, stated “a new windfall gains tax on these
profits will claw back an estimated $40 million a year”. It is unclear how the government
arrived at this figure, but if this is the government’s benchmark revenue figure will the
arrangements include a moratorium for any further direct collections beyond this amount?
3. CONCLUSION
HIA does not believe the proposed tax reforms should proceed due to the impact they will have on
future housing supply and housing affordability for all Victorians.
Stamp duty
In general, stamp duty is simply a bad tax that punishes people for pursuing the dream of
home ownership. It punishes people for moving house, discouraging people from moving
towards regions of superior employment prospects. This prolongs imbalances between
regions, costing the economy lost wealth and productivity.
Even levied just at the top end of the market, stamp duty affects the rest of the market by
reducing ‘churn’. It discourages people from buying properties for the purposes of
residential development.
By discouraging ‘churn’ at the higher end of the market, it will also shift demand to other
market segments, thereby inflating their prices, causing a broader deterioration in
affordability.
This may undercut any revenue the government is hoping to generate from this tax.
Land tax
A broad based, non-distortionary land tax is generally argued to be an efficient tax.
This increase in land tax is not broad based. It would be applied to only specific segments
of the market. This will have distortionary impacts on the market as developers change their
behaviour in an effort to avoid the tax. The cost of tax will include activity that is avoided.
Windfall gains tax
The application of a windfall gains tax retrospectively on existing commercial arrangements
is completely inappropriate.
The application of a windfall gains tax on the future development of residential land will
directly add to the cost of housing in Victoria and reduce housing supply.
Page 7 of 8 | Proposed changes to Victoria’s property taxes, June 2021 The Budget Papers do not include sufficient detail to understand how the windfall gains tax
would operate, what projects will be captured, what income will be generated and how any
infrastructure funded by the tax would be guaranteed.
The introduction of a windfall gains tax managed wholly by Government authorities will
completely undermine the independence between the rezoning and land valuation process
as the same entity will be responsible for both the rezoning decision and the land valuation
decisions.
A spike in land prices is inevitable. As rezoning potential, development feasibility and
optimal yield informs a purchaser what they should pay for a piece of land, many residential
development projects in the pipeline have already generated a baseline lot price based on
either today’s terms or past economic settings. Housing affordability will be impacted if the
tax is applied retrospectively to the extent that future land sales will carry a ‘premium’ price
increase to make the project commercially viable.
Clear direction is required regarding to ensure there is no double dipping of taxes under the
windfall gains tax and a current or future local contribution plans to fund the same social
and community infrastructure.
The competitive advantage enjoyed by regional Victoria for land supply will be stripped.
This tax is another cost to development which will be incrementally broken down and
lumped into individual land sales prices. It will impact regional Victoria particularly hard
which currently benefits from a competitive advantage to metropolitan growth areas where
associated levies are linked to denser population growth. Regional home buyers are
looking for a combination of lifestyle and affordability, with this tax having the potential to
completely strip out the future affordability of land for new housing.
As a significant financial impediment on the land owner, the tax is a deterrent to transact
and develop which will contribute to less lots going onto the market.
The tax impost does not take into consideration the significant investment made by
residential developers to bring land to market including time, feasibility investigations,
purchasing costs, holding costs, planning approvals and meeting service authority
requirements, design and engineering requirements.
Moreover, the tax fails to recognise the significant contribution that residential development
makes to delivering and funding community infrastructure under existing planning and
taxation regimes. In all likelihood, many land development projects subject to this tax will
not proceed contributing to a short supply of new land in major regional areas of Victoria.
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