to the South Australia Department of Treasury and Finance on the State Tax Review 13 April 2015
Foreword...3 1. Executive Summary...4 2. Economic and housing backdrop in South Australia...4 3. Taxation and New Home Building...6 4. Conclusion... 10 HIA: Robert Harding Regional Executive Director, Housing Industry Association Cnr Station Place & Port Road Hindmarsh SA 5007 Phone: 08 8340 5900 Email: r.harding@hia.com.au HIA is the leading industry association in the Australian residential building sector, supporting the businesses and interests of over 40,000 builders, trade contractors, manufacturers, suppliers, building professionals and business partners. HIA members include businesses of all sizes, ranging from individuals working as independent contractors and home based small businesses, to large publicly listed companies. 85% of all new home building work in Australia is performed by HIA members.
Foreword The Housing Industry Association of Australia welcomes this opportunity to provide a submission to Department of Treasury and Finance on the State Tax Review in South Australia. Whereas the housing industry nationally is enjoying unprecedented levels of strength, new dwelling activity in SA has fallen below its decade average and looks set to weaken further over the short term. The fact that residential construction is one of the most heavily taxed sectors of the SA economy makes it far more difficult to reverse the trend of decline. The recent experience of states like New South Wales shows that a strong residential construction sector has significant benefits in terms employment, economic activity and state government revenues. This HIA submission outlines revenue-neutral ways in which taxation could be recalibrated in order to ensure better economic outcomes for SA and boost the struggling new home building sector in the state. Robert Harding Regional Executive Director, South Australia 13/04/2015 Page 3 of 10
1. Executive Summary The housing sector is one of the most heavily taxed sectors of the Australian economy, both in absolute and relative terms State-based taxes comprise the highest proportion of taxation on new housing activity and supply. The South Australian Government s decision to review and consider reforming the state s taxes provides South Australia with the opportunity to be a leader among the other states and remove inefficient state-based taxes. The State Tax Review Discussion Paper identified the importance of having a competitive tax environment to attract business investment, job creation and to ensure the state remains an attractive place to live for all South Australians. Improving in particular simplifying the current taxation requirements and compliance burden that fall disproportionately on small businesses is a critical element to the process of reform. Nevertheless, any discussion regarding the competitiveness of SA s state taxes against other jurisdictions must include the role of taxes on housing, and the consequent level of housing affordability, relative to other states and territories. The most defective of taxes that must be removed as a matter of priority is stamp duty on residential property conveyances, and in this submission HIA outlines the empirical evidence to support this goal. 2. Economic and housing backdrop in South Australia Nationally, new home building reached record highs during 2014 with an estimated 195,470 new homes commencing construction. This represented an increase of 16.3 per cent on the previous year. However, the national recovery has largely passed the SA market by. During 2014, new dwelling starts in the state were below the average of the previous decade. As Figure 1 shows, new home building in SA declined from 12,347 commencements in 2009/10 to just 8,832 starts in 2012/13, a reduction of almost 30 per cent. This slump was arrested only after the intervention of the state government through the grant for new home buyers, which helped bring new dwelling starts back above 10,000 during 2013/14. HIA forecasts that new home building in SA will decline by 7.2 per cent during 2014/15. This will result in activity again falling below the 10,000 threshold to 9,945. From 2015/16 onwards, activity is projected to rise to 11,189 starts by 2017/18. However, this modest upward lift will depend on economic conditions and in any event will be well below the peak in activity reached during 2009/10. Within the SA new home building market, there is some disparity between the performance of the detached house and multi-unit segments. Detached house building has borne the brunt of the downturn across residential construction. Between 2009/10 and 2014/15, detached house starts in SA are estimated to decline by a total of 24.2 per cent. Over a similar period, multi-unit starts are estimated to fall by less than 2 per cent. During 2013/14, detached house starts saw an increase of 24.2 per cent. Multi-unit dwelling commencements saw growth of 13.7 per cent over the same period. During 2014/15, the HIA forecast is that detached house starts will fall by 7.2 per cent with a reduction of 7.1 per cent in multi-unit commencements. 13/04/2015 Page 4 of 10
Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Number Thousand dwellings commenced Figure 1: SA housing commencements history and forecasts SA Housing Starts Forecasts Source: HIA Economics 14.00 12.00 10.99 11.22 10.70 10.00 11.93 12.14 12.35 10.95 9.14 8.83 10.71 9.95 Forecast 10.45 10.88 8.00 6.00 4.00 2.00 0.00 2004/05 (a) 2005/06 (a) 2006/07 (a) 2007/08 (a) 2008/09 (a) 2009/10 (a) 2010/11 (a) 2011/12 (a) 2012/13 (a) 2013/14 (a) 2014/15 2015/16 2016/17 There are considerable downside risks to the forecasts for detached house building activity. The figure below illustrates the pipeline of approvals for new detached homes in SA, a precursor to actual new home building on the ground. Since the beginning of 2014, new detached house approvals have fallen steadily. The risk is that activity will continue to fall, resulting in new home building levels dropping lower than the above forecasts suggest. Figure 2: SA detached house building approvals Building Approvals SA - House Source: ABS Building Approvals, HIA Economics 1100 1000 900 800 700 600 500 400 300 Seasonally adjusted Trend The underwhelming performance of new home building activity in SA is despite the regime of record low interest rates in Australia over the last two years. The favourable interest rate backdrop has been overshadowed by weak economic conditions in SA and the relatively high dependence of the state on more traditional industrial sectors. Economic activity in the state has been hurt by the unprecedented strength of the Australian dollar on international currency 13/04/2015 Page 5 of 10
Tax on a New Home( % of final home price) markets. This has hampered the ability of the state s outputs to compete with other markets on the basis of price. The relatively high rate of unemployment in SA is one of the most prominent consequences of this. The lower exchange rate over recent months has failed to arrest and reverse the deterioration in state output in SA. The cumulative impact and excessive taxation on new housing and the state s poor economic conditions have resulted in extremely weak new housing activity across the state. Pessimistic consumer sentiment in SA has also adversely impacted the home renovations market in the state, despite low borrowing costs. 3. Taxation and New Home Building 3.1 Housing is heavily taxed Independent research conducted by the Centre for International Economics (CIE) finds that Australia s housing sector is one of the most heavily taxed sectors of the economy, both in absolute and relative terms. Total taxation levied on new housing in Adelaide is estimated to be 38 per cent of the final price of a new house and land package, and 32 per cent of the final price of a new apartment. This is as illustrated in the figure below. By any standard this is a high percentage of taxation and the taxation on housing in Adelaide is equivalent to the larger cities of Melbourne and Brisbane. The high tax burden on housing distorts the market and raises housing costs. Consequently, households experience lower levels of housing affordability and their housing choices are restricted. These pressures and restrictions take effect across the state s housing continuum; from owner occupiers into the private rental market, through to severe pressures on the public and social housing sphere. Figure 3: Taxation on houses and apartments Taxes on Housing Source: Taxation of the Housing Sector (The CIE, 2011), Taxation generated from the housing sector: an extension (The CIE, 2013) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 44% 35% 38% 38% 33% 34% 41% 38% 38% 36% 37% 32% 32% 32% 33% 34% Sydney Melbourne Brisbane Perth Adelaide Albury Wodonga Townsville Houses Apartments The CIE research also breaks down the costs of greenfield land development land development pertaining largely to detached housing across different cities. The results reveal that in Adelaide, after actual raw land and development costs, zoning restrictions (found to be hidden taxes) account for the second largest portion, 24 per cent, of development costs. This does not compare favourably with other capitals; these hidden taxes account for as little as 5 13/04/2015 Page 6 of 10
per cent of land development expenditure in Brisbane, 15.0 per cent in Sydney, and 22.0 per cent in Perth. Figure 4: Costs of greenfield land development The heavy impost of zoning restrictions on land development in Adelaide has had a marked impact on land values, with Adelaide having the third most expensive per-square-metre residential land values more expensive than all other Australian regional and metro areas (except Sydney and Perth). Detached housing is an increasingly premium housing product such that it is accounting for a declining share of new home building than has historically been the case, particularly in the major capital cities. SA has the potential to offer South Australians affordable detached housing by addressing these zoning restrictions which inflate residential land prices and ultimately, detached housing prices in particular. 13/04/2015 Page 7 of 10
Source: CoreLogic RP Data, HIA Economics, ABS Figure 5: Capital city land values per square metre RESIDENTIAL LAND VALUE (PRICE PER SQUARE METRE) - CAPITAL CITIES $700 $646 $600 $536 $582 $541 $500 $492 $437 $400 $300 $200 $229 $250 $271 $220 $205 $100 $108 $0 Sydney Melbourne Brisbane Adelaide Perth Hobart Sep-04 Sep-14 3.2 Abolishing stamp duty on conveyances Stamp duty is an inefficient and volatile tax The inefficiency and volatility of stamp duty renders it a defective tax by the SA Government s own stated tax objectives, namely that the tax system should collect revenue as efficiently as possible and be as stable and predictable as possible. Of the taxes collected in SA, stamp duty is amongst the least efficient. Stamp duty results in the housing stock in SA being used less effectively by dissuading homeowners from vacating their current homes for ones more suitable to their needs. By impeding the movement of people from one place to another, stamp duty also restricts labour mobility and prevents the economy and workers from reaching their full potential. The Australia s Future Tax System Report of 2010 ( the Henry Tax Review ) and other more recent studies have consistently identified stamp duty as one of the most inefficient taxes, due to its negative impact of the use of scarce resources like land and the state s dwelling stock. The Review also noted the real life consequences of this tax : People may commute more, adding to road congestion; People do not use the existing stock as effectively, choosing to renovate rather than move to larger place, or remain in a larger place rather than downsize Adds to the cost of moving restricts labour mobility, leading to poorer labour market outcomes The particular inefficiency of stamp duty has also been identified in the SA Government s own State Tax Review Discussion Paper and in research by the Centre for International Economics and Independent Economics. In addition to the aforementioned inefficiencies, stamp duty is also one of the most pro-cyclical of revenue streams. This means that it is unstable and volatile, fluctuating considerably in response to changes in the economic growth rate in SA. Having such a proportion of government revenue subject to this variability runs against the SA Government s stated objective of achieving a stable and predictable flow of revenue. The current process for levying stamp duty can involve triple taxation. Stamp duty can be imposed at three stages in the construction of a new house: 13/04/2015 Page 8 of 10
Sale of land to developer; Sale of land from developer to builder; and Sale of house and land package to purchaser. At each stage in housing production, stamp duty can be collected on the contract sale price and levied on top of items such as GST, development charges, as well as the stamp duty already paid in previous transactions involving the property. Removing stamp duty must be the top priority for housing tax reform Independent research conducted by Independent Economics highlights that abolishing stamp duty on property conveyances must become top priority for housing tax reform. Compared with other tax reform scenarios, abolishing stamp duty yields the strongest gains to both households and business through a larger reduction in rents (both actual and imputed), and larger increases in the consumption of housing services. Abolishing stamp duty and revenue neutrality The SA government estimates stamp duty will account for 20 per cent of government revenue during the 2014/15 financial year, equivalent to $886 million. There are more efficient ways in which state revenues could be raised in SA, involving the abolition of stamp duty. Independent modelling work looked at replacing conveyance stamp duty by altering the design of state land taxes. Other research explored the possibilities for replacing stamp duty through increasing GST revenues. Given the bounds of the Tax Discussion Paper that the discussion concentrate on state-based taxes HIA s submission focuses on the benefits of abolishing stamp duty and replacing it with a well-designed land tax. Critically, research by Independent Economics models a well-designed land tax as recommended by the Henry Review. This would involve the land tax being levied across as broad a base as possible, to minimise the distortions to household and business choices. This contrasts with the existing regime which includes numerous and substantial exemptions, making the base relatively narrow and therefore less efficient. The current major exemption for owneroccupied housing represents a distortion to the housing market and as the Henry Review finds, the burden of land tax, ultimately, is likely borne by renters through higher rents. Consistent with the Henry Review s recommendation, the ideal land tax should be applied on a per-land-holding basis, rather than on an entity s total holding. Applying tax to aggregated land holdings discourages large-scale investment in land, which has the particular effect of discouraging large-scale investment into rental housing. It is therefore important that land taxes in SA are applied on a holding by holding basis, and that the practice of aggregating an individual or entity s holdings is discontinued. The modelling provides estimations around the well-designed land tax such that revenue neutrality is achieved. By replacing stamp duty with a well-designed land tax which includes owner occupiers, independent research estimates that: Residential rents would decline by 6.2 per cent; Housing consumption would increase by 4.1 per cent; and Living standards in SA would increase by about $335 million. The wider productivity and economic benefits of removing stamp duty The framework of the Independent Economics modelling on tax reform is one whereby alternative rates of land tax and/or GST are set such that revenue neutrality is achieved, 13/04/2015 Page 9 of 10
meaning that overall SA government revenue is left unchanged. However, the abolition of stamp duty would enhance economic growth prospects over the longer term, resulting in improved prospects for the state government s finances. The abolition of stamp duty would enhance the productivity of the residential construction sector leading to lower residential construction costs, additional employment and substantial benefits to the wider economy. Separately, further research by the CIE shows that a reduction in regulation and in inefficient taxes on residential housing would not only benefit the construction sector, but also the broader economy. Residential construction itself is a labour intensive sector, but also has wide reach into the broader economy through its linkages with numerous other sectors both upstream and downstream; including building products manufacturing, real estate services, and retail. Modelling by the CIE demonstrates that a 1.0 per cent productivity increase for residential construction can generate a step change in overall economic activity in the South Australian economy worth $54 million a year. Productivity could be increased through avenues such as reductions in planning approval times, the removal of workplace restrictions, and the reform of environmental controls, building regulation and apprenticeship training; Furthermore, the associated increase in residential building would boost broader economic activity (gross state product) in the South Australian economy. The modelling estimates that a 1.0 per cent productivity increase for residential housing results in $4.20 of additional GSP per increased dollar of activity in residential housing; The benefits of higher productivity in residential construction will significantly greater in economies not experiencing full employment, as is the situation in SA currently. 4. Conclusion The unprecedented upturn in residential construction nationally has largely passed the SA economy by. During 2014, new dwelling starts in SA were below the decade average and are forecast to weaken further over the short term. Detached house building has been particularly adversely affected by the downturn in residential construction. At the same time, residential construction continues to be one of the most heavily-taxed sectors of the SA economy. In Adelaide, total taxation is estimated to account for 38 per cent of the price of new house and 32 per cent of the new apartment price. As well as adding to costs and distorting the market, the high taxation burden represents a serious barrier to recovery in the SA residential construction industry. It is widely accepted that stamp duty is amongst the least efficient taxes in terms of its burdensome effects on economy activity broadly. Stamp duty restricts labour mobility and prevents the state s dwelling stock from being used to its full potential. The imposition of stamp duty adds considerably to the costs of housing and serves to stifle the pipeline of new home building. Modelling by Independent Economics has shown that SA government revenue could be enhanced by abolishing stamp duty and replacing it with a well-designed land tax. This new land tax design would involve the owner occupier and other exemptions being ended, and the practice of aggregation being discontinued. Replacing a heavily inefficient tax with a more efficient one would provide wider benefits to economic activity, employment and living standards. The long-term revenue position of the SA government would be much enhanced under such a scenario. 13/04/2015 Page 10 of 10