This property tax madness must stop

PORTFOLIO POINT: Governments are too dependent on taxes raised from property owners. It’s a chronic problem requiring urgent reform.

Last week NSW Treasurer Eric Roozendaal reminded us how dysfunctional property taxes have become when he tried to sneak through yet another charge to property owners: a new transaction charge of 0.2% for properties valued at $500,000 or more or 0.25% above $1 million.

Federal and state governments alike are growing increasingly dependent on taxes raised from property owners and this over-dependence comes at a high cost. Rapidly decreasing housing affordability, a growing shortage of housing for buyers and renters and significant financial penalties for residential property investors are among the chief symptoms of a chronic problem requiring urgent reform.

Australia’s home buyers and investors deserve a decisive reform of the byzantine maze of ill-conceived property taxes and stimulants. It's high time to end the farce of artificial boosts to the market one year followed by jumps in government tax revenue and interest rates the next.

Serious reform of property taxes would certainly prove more productive than the $1 billion thrown away in last year’s boosted first-home buyer grants!

So what should we do to make our property taxes more equitable and efficient?

I believe a starting point on property tax reform should include the scrapping all first-home buyer grants in favour of a reassessment of stamp duties and the introduction of a serious First Home Savers Account (FHSA).

Let’s look at the first home buyer grants first.

The federal government’s billion-dollar boost failed to help stimulate the residential construction industry as hoped. Only about a third of first-home buyers used the grants to buy newly constructed homes. The rest bought established property, which only resulted in substantial price increases, which in turn locked more Australian home buyers out of the housing market – permanently.

Long-term housing affordability wasn’t helped, either; it fact it was dealt the heaviest blow since affordability statistics have been kept.

What has surprised me is how the federal government introduced an FHSA in 2007, which proved completely inadequate to first-home buyers’ needs and instead of reforming it, kept it hidden while they engaged in stimulus politics.

For these accounts to be truly instrumental in helping first-home buyers they should be able to accept salary sacrifice contributions taxed at the super rate of 15%, rather than contributions of after-tax income.

Second, the accounts need to be structured to attract an investment return that does not fall below a critical level, say at present 4%. How can aspiring buyers keep up with the property market given the impact of inflation on their savings?

Then there’s the stamp duties paid by all buyers, one contributor to our ongoing housing affordability problem; and the land taxes paid by property owners, a key disadvantage for Australian investors.

Stamp duty revenue will reach $2.73 billion in NSW this year and $1.7 billion in Queensland.

Stamp duties fall hardest on the struggling first-home buyers and are a large contributor to their “barrier price and deposit gap” for entering the market. Stamp duties are also a major deterrent to residential property investors, often the main factor keeping many would-be investors out of the market.

In addition to stamp duties on their purchase, investors are also hit by land tax, income tax from net rental income and capital gains tax should they decide to sell. Governments are essentially “double-dipping” – they get land tax during the holding period and capital gains tax on the sale. Is that truly equitable if they are serious about encouraging Australians to take active measures to secure their financial future for retirement?

Jennifer Cunich, Victorian executive director of the Property Council of Australia, believes that reform of stamp duty would improve affordability. “Ideally, there would be no role for any stamp duties, including conveyancing stamp duties, in a modern Australian tax system,” she says. Cunich believes the duties are inequitable, volatile and highly inefficient and should be replaced with a more efficient means of raising revenue.

“Stamp duties discourage transactions of commercial and residential property, and through this, its allocation to its most valuable use. It also discourages people from changing their place of residence as their personal circumstances change. It is also inequitable, as people who need to move more frequently bear more tax, irrespective of their income or wealth,” she says.

It doesn’t help that under current arrangements, Australian investors face different stamp duty and land tax regimes in different states.

On the subject of land tax, Cunich says levying higher taxes on larger holdings discourages land-based investment by institutional investors in rental housing. As owner-occupied housing is exempt, land tax on residential investment properties is probably passed through to renters as higher rent.

Some have identified negative gearing as government assistance that should be scrapped, but I believe it has an important role to play in helping investors enter and remain in the property market. After all, it’s Australia’s 1.3 million investors who claim a tax loss each year that are funding the housing stock of something like four million households who rent their primary residence.

Without this assistance, governments would have to step in and provide public housing, or face chaos as rents rise and investors abandon the market.

What Australia needs is a more uniform and efficient approach to land tax. The Property Council says the structure of land taxes could be improved by broadening their scope to be based on the value of a given property, so the tax does not discriminate between different owners or uses of land.

While the issues are complex and many, I do not accept that we are unable to find a way to release ourselves from the current “tax and spend” mess. What we seem to have is an overly bureaucratic and inequitable system, good at growing tax revenues at the expense of investors and home buyers.

It’s time for change.

Property Q&A

This week:

• What to do about noisy, non-paying tenants?
• Where to buy in Canberra?
• What is a reasonable property management fee?
• Investing in coastal areas.

Troublesome tenants

The new tenants in our investment property have missed their rent payments and sparked complaints from the neighbours with their loud music. We’ve asked the agent to give them notice, and my husband and I want to vet any prospective tenants before we let the property again. Is this a fair thing to ask the agent?

In relation to the late payments and noise, I should warn you that you can’t just break an existing lease with your tenants. The rules are different in each state, but if tenants are weeks late with their rent, you can usually issue them with a notice to pay or vacate your property. If they decide to challenge the notice, you typically need to appear before an administration tribunal and substantiate your reasons for giving notice. If tenants are at the end of their lease, in most states you can give them a notice to vacate without having to cite a reason. In the first instance, ensure the property manager meets face to face with tenants and attempts to resolve both issues on the spot.

The best way to avoid problem with tenants is to follow the correct tenant applications process in the first place and engage a property manager with an excellent reputation. A competent property manager should have all prospective tenants fill out an application form, which itemises their address, employer, income and referees. The agents should use this information to screen applicants and come up with a suitable shortlist. You should then meet with the agent and together choose the best application. The key to getting this right is to ensure the agent checks their references from their previous landlord or agent before they signing a lease; if they were responsible tenants before, they’re most likely to be responsible again. You should also seek to have rent payments automatically debited from the tenant’s bank account; this helps minimise late payments.

Although you can meet and screen prospective tenants in person, you cannot discriminate against anyone on the basis of race, religion, age, marital status, gender or disability. That said it’s better to get the agent to conduct interviews and keep a business-like distance between yourself and the tenants.

Before you start this process again, sit down with the property manager and discuss what happened with the last tenants. Did they conduct detailed reference checks and follow the process fully? Does the lease agreement with the tenants cover issues likely to arise during the tenancy, such as on-time payment of rents, the property’s use, noise, condition and cleanliness? If they didn’t do so sufficiently it might be time to consider a new property manager.

Buying in Canberra

Our son has returned to live and work in Canberra and wants to buy his first home. His work requires him to be away often and he believes a unit is his best option. In which areas should he look? Prices seem quite high in inner areas and maybe a house a little further out would be better.

My answer depends upon what you mean by “better”? For property investors or home buyers interested primarily in the financial outcomes of owning property, the most important attribute is a property’s potential to achieve reliable above-market capital growth.

In Canberra, as in all Australian cities, investment-grade properties – likely to achieve better capital growth – tend to be closer to the CBD, where there is good access to transport and shops, schools and recreation. That makes the inner ring of Canberra, particularly the areas close to Civic and Lake Burley Griffin the best for capital growth purposes.

For many people who have to travel frequently for work, units can prove to be the better lifestyle option, which sounds like it will suit your son best. If he is also looking to maximise his capital growth it should also prove better for him to own a unit in a high land value, high growth area than a larger property in a lower land value, lower growth area in the outer suburbs.

Agents’ fees

I have investment properties in WA and Victoria managed by agents. I cannot understand why property management fees in Melbourne are so much lower than those in Perth. For instance, I was able to negotiate fees of 5.5% in Melbourne, but in WA I could not get fees below 7.7%; and while the Victorian fee included inspection reports, in WA these reports were an extra cost. Are you able to shed any light on why this is the case?

In the Melbourne market, property management fees are typically around 7% plus GST, so it sounds like you’re getting an excellent deal here. Different property managers work with different pricing structures depending on their business environment.

Some agents discount fees for owners with multiple properties while others discount their fees to attract new business in a tightly contested market. Some agencies try and attract business with a low rate and then charge additional fees for other services, while others target owners with a percentage fee that covers most conceivable services. In markets with insufficient competition, agents have little incentive to discount their rates below what the market is willing to pay.

From your description, it sounds to me that the Perth market’s demand for property managers is evenly balanced with the supply, while the fees you have negotiated in Melbourne are much sharper. That’s great for you if the Melbourne property manager is doing an excellent job. But you should be careful that any attempts you make to lower management fees comes at the expense of the quality of the job your agent is doing.

Property managers are paid to look after your assets, which will be worth hundreds of thousands of dollars. You don’t want any shortcuts being taken just to save a few dollars.

Holiday spots

I was interested to read your response to investing in southeast Queensland and compare it to your article Investing outside the capitals where you stated: Only invest in a major cities with a population of 100,000 or more and make sure it’s no more than two-and-a-half hours' drive from the capital. Why is the Sunshine Coast, with a population of 250,000 and within an hour of Brisbane, a holiday spot rather than a “major centre”?

It’s a terrific question and one I get quite frequently. The simple answer is that like many other coastal centres, the Sunshine Coast is dominated by what we may refer to as the “holiday industry”. Property investment is always more precarious in any major centre dominated by one industry because its economic fortunes and property values are subject to the specific vulnerabilities of one economic activity. This is why the Sunshine Coast local council has put a lot of effort into trying to attract industry from other parts of Australia and to promote the Sunshine Coast University. It well understands that the broader the economic base, the more stable their economic environment and property values will be.

There is another drawback for property owners in a holiday resort areas: many properties, perhaps the majority, are bought as holiday rentals, homes or flats, not as the owner’s primary residence. If any of these owners get into financial trouble, the first thing they will look at selling is the holiday house rather than the family home (for more on this, see Trouble in paradise). That’s why during economic downturns we tend to see hundreds of For Sale signs spring up in coastal areas, and indeed this was the case in some parts of the Sunshine Coast during the first half of 2009. During these times, property values can fall sharply and when the downturn is over, values tend to rise much more slowly than large capital city markets.

Getting the best return from property investment is not a process that treats every region fairly; in fact, the difference between a regional area that is reasonable for property investment and one that isn’t can be seemingly slight. But there’s no doubt where the best opportunities lie: in the inner rings of the biggest urban centres, which have the broadest possible economic base.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique Wakelin? Send an email to monique@eurekareport.com.au.