There are some practical difficulties with the proposal by the Master Builders Association, as reported in the Advertiser and online (News link) (Advertiser link), to have stamp duty paid by the vendor of land when it is sold, instead of by the purchaser.
The proposal forms part of the MBA’s submission on the current review of South Australia’s state taxes, and it might be more accurate to call it an idea put out for consideration instead of a full-on proposal, as the MBA sensibly qualifies their points in the full submission available here: link.
Although a purchaser traditionally pays stamp duty on the purchase of land—and it has to be paid by someone—there’s no set requirement that it must be the purchaser instead of the vendor. Stamp duty taxes the documents used in the transfer of land, and the Stamp Duties Act 1923 says that all of the parties to a contract are liable for payment of the duty.
Vendors will always prefer not to have to pay the stamp duty, so there would need to be some mechanism to prohibit vendors trying to recover it from purchasers.
A number of initial thoughts arise:-
- There would certainly be some advantages for people getting into the property market.
- There would be a lot of extra complication as part of the transition process if you don’t want to hit people with duty twice. The simplest form of transition would be to create a once-off exemption from duty for the next sale of each property. Current owners would not pay it when they sell and purchasers won’t pay it until they on-sell the property. But that would lead to a huge tax revenue gap until it kicks in, although long term it might increase duty with respect to land developments.
- Alternatively to that way of conducting the transition, you could very gradually shift the responsibility for payment over from the purchaser to the vendor (i.e. over 10-20 years) so that there is less disruption.
- There are other transactions not involving land that involve dutiable sales, including sales of business and of motor vehicles. Would these be dealt with in the same way? Businesses and cars are different in that they might never be on-sold so presumably land would be treated as a special case.
- Valuations of land would be skewed by the change, and while it may encourage the purchase of land, it will discourage the sale of land purchased after the change. If you are a vendor who does have to pay duty, and you are competing with many vendors who don’t have to pay duty (if there are transitional arrangements such as those above), you will be less competitive and may prefer to hold off until the playing field starts to level off.
- Banks and other lenders would still need to take the cost of stamp duty into account, although they might do so as part of determining the equity/LVR in the property. That is because the bank would presumably need to pay the stamp duty if there is a default on the loan and a mortgagee sale is conducted. That would likely also mean greater lenders mortgage insurance premiums for first home buyers.
- You would hate to have made a bad investment and then have to suffer the penalty of stamp duty in order to cut your losses. It would also be very easy for people to borrow and expect that they’d pay the stamp duty out of the increase in the land value, only to never see it happen.
- For family law property settlements and inheritance disputes, the effect of future duty would need to be adjusted for or taken into account in a way that is not presently required.
- There might be a greater movement to having property transferred into family trusts, because the cost of doing so won’t be seen for many years. Distributions of property out of trusts to beneficiaries would probably need to be dutiable as well (whereas they are not now).
- The change would put us out of step with every other state, possibly interfere with some of the implementation of the national e-conveyancing system, and would certainly be an increase in overall regulation of the industry.
Overall, I just can’t see it happening. Reducing or getting rid of stamp duty in favour of some other model seems much more achievable.