Inquiry into Victorian Government Taxation and Debt

Transcription

1 Property Council of Australia Inquiry into Victorian Government Taxation and Debt A Submission to the Economic Development and Infrastructure Committee of the Victorian Parliament 30 September 2009 The Voice of Leadership Level Exhibition Street, MELBOURNE ABN PH FAX vic@propertyoz.com.au -

2 Table of Contents Executive Summary...3 Recommendations Land Tax Stamp Duty Payroll Tax Harmonisation: State/National Reform CBD Car Parking Levy Rates and Valuations Fire Services Levy Retail Developer Levies and Charges Infrastructure and Debt Sustainability and Climate Change...32 References...35 Contact...35 Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 2 of 35

3 Executive Summary The Property Council is the largest and most influential industry organisation within its sector and has in excess of 2000 member companies throughout Australia representing property assets of over $300 billion. Approximately 500 of these members are part of the Victorian Division. Members of the Property Council represent the entire property investment cycle: finance, design, development, maintenance of property and the services that underpin the industry. The Property Council believes that state property taxes such as land tax and stamp duty are a disincentive to investment. Land tax and stamp duty eat away at the retirement savings of ordinary Australians. Ten million Australians own commercial property through their superannuation, property trusts or life insurance policies. Reforming these inefficient taxes would drive economic development and give a financial boost to virtually every household. The Property Council is committed to exploring the best means of increasing the economic welfare of Victorians, while providing the Victorian Government with a predictable and growing revenue base within the context of a world-class tax framework. While the Property Council acknowledges the Victorian Government s recent tax reform program, reform must be carried out to maintain a truly competitive State. In the Victorian Government s submission to the Henry Review it has been emphasised that, despite facing the worst global economic conditions in generations, efforts at major, long term reform are essential for a strong recovery and a prosperous future. 1 The Property Council agrees with this sentiment and believes that Victoria is in a strong position to instigate reform. On that basis, the Property Council recommends that the Victorian Government should initiate a range of measures within the State aimed at long term structural reform. The 2009 Victorian State Government budget saw an increase in debt funding of infrastructure, a position the Property Council has advocated over a period of time. We believe the Victorian Government should continue to use debt to invest in major infrastructure projects. At the national level, the Victorian Government should provide leadership in working with other Australian Governments in reforming Australia s taxation system. The central task for all Australian Governments is to pursue best practice harmonisation models across all States. The cumulative effect of these measures will be to stimulate economic activity and enhance the competitiveness of the Victorian and Australian economies internationally. Jennifer Cunich Executive Director 1 Victorian Government, A Tax System that Works for Australia: Victorian Government Submission to Australia s Future Tax System Review, Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 3 of 35

4 Recommendations Land Tax 1.1: Commit to moving towards flatter land tax rates by further reducing the top marginal rate to 1.5%. 1.2: Change land tax assessment periods and land valuations in line with the financial year to ease the compliance burdens of property owners. Stamp Duty 2.1: Cut the top rate of stamp duty on commercial property transactions to 4.5 per cent. 2.2: The next step is to move to the abolition of stamp duty on commercial property transactions in line with broadening the tax base. 2.3: To ensure that the Australian real estate investment trust (REIT) market remains a world leader and competitive, stamp duty rules must be rationalised to remove red tape, eliminate double taxation and promote the efficient movement of capital whilst ensuring that the current tax base is protected. 2.4: Amend the Duties Act to extend the corporate reconstruction relief to both listed and unlisted trusts in line with the Federal Government Capital Gains Tax relief. 2.5: The Victorian Government must immediately address instances of stamp duty being applied on top of other taxes, levies and charges. Payroll Tax 3.1: Accelerate the breadth and depth of payroll tax harmonisation between all States with consideration of the NSW Victorian agreement. Harmonisation: State/National Tax Reform 4.1: The Victorian Government should advocate to other Australian Governments to adopt the Business Coalition for Tax Reform (BCTR) State Tax Reform Model for comprehensive business tax reform. 4.2: Australian Governments should commit to a new round of business tax reform in consultation with industry, underpinned by a new inter-governmental agreement (IGA). 4.3: The Council of Australian Governments (COAG) should: (a) set a timetable to eliminate inefficient business and property taxes with clear performance milestones; (b) commit to a root and branch modernisation of the business tax system; (c) commit to a new system for allocating the GST revenue between jurisdictions; (d) set a five year target to reduce Australian Government reliance on indirect taxes; (e) commit all States and Territories to undertake five yearly reviews of the indirect tax systems with the objective of reducing their reliance on high dead weight taxes and reducing compliance costs. Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 4 of 35

5 4.4: Australian Governments should ratify a new IGA to give effect to COAG s tax reform program. CBD Car Parking Levy 5.1: The Victorian Government should abolish the CBD Car Parking tax. Rates and Valuations 6.1: The Victorian Government should seek from Councils a financially responsible program. The rate burden should be distributed away from the property classes that are over-taxed. Furthermore, measures should be introduced to ensure that rate increases are no greater than CPI. 6.2: The Victorian Government should take a more proactive and financially responsible role in monitoring increases in council rates. 6.3: The City of Melbourne s differential rating scheme should be revised. Fire Services Levy 7.1: The Victorian Government should conduct another review of the fee structure and protocol of false callouts in The Property Council believes the findings of this review should be in line with other jurisdictions where industry should be granted one false alarm callout per 60 days without charge. Retail 8.1: The Victorian Government should amend the following areas of the Retail Leases Act 2003: no costs at VCAT; management fees and land tax. Developer Levies and Charges 9.1: The Victorian Government must work with key stakeholders to address issues with the implementation and delivery of infrastructure in growth areas. 9.2: The Growth Area Infrastructure Contribution (GAIC) is to be levied after the completion of the Precinct Structure Plan, when the developable area of the property is known, and is paid on the first transaction on transfer of land. In the case of land which is not sold, prior to its subdivision or development, the land owner will pay the GAIC progressively at the end as part of the development process. 9.3: The Victorian Government should use alternatives to developer levies to finance future infrastructure. (Refer to section 10) 9.4: Developer levies should be used as a last resort and abolished completely in the medium term. 9.5: These charges should be reviewed and greater consultation to take place with the development industry before any final decision on local charges is made. Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 5 of 35

6 Infrastructure and Debt 10.1: The Victorian Government should increase its debt capacity to deliver major infrastructure projects. 10.2: The Victorian Government should maximise government borrowing, PPPs and tax increment funding (TIF) to fund future infrastructure, in preference to inefficient developer levies. 10.3: The Victorian Government should commit to a major investment in infrastructure as a public good to address existing infrastructure deficits, cater for new population growth and drive future economic growth. Sustainability and Climate Change 11.1: Provide assistance and incentives for building retrofits including grants, subsidies, accelerated project approvals and rebates for improvements undertaken by households and the commercial sector. 11.2: The Victorian Government should advocate for the provision of accelerated sustainable building depreciation through the Australian tax code providing for building investments that involve specific energy efficient fittings, fixtures and fabric or raise the overall energy performance of the building to a specific standard. 11.3: Change the feed in tariff policy from a net to a gross feed in tariff model to provide greater financial incentive for the take up renewable energy sources. 11.4: The Victorian Government should advocate for a fair distribution of Carbon Pollution Reduction Scheme (CPRS) funds for Victoria similar to that of the GST. 11.5: Expand the Victorian Energy Efficiency Target (VEET) scheme to the commercial building sector through the remittance of state duties to drive energy efficiency gains and benefits for the Victorian industry. Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 6 of 35

7 1. Land Tax The high cost of land tax in Victoria continues to be a serious disincentive to property investment compared with other asset classes. It is unduly progressive and biased against holders of large holdings in a single vehicle. There is no equity in the progressive rate structure. The many individuals who have small investments through listed companies, superannuation and public trust investments together pay land tax at a rate based on the aggregated holdings of the investment institution. The effective rate for those small investors is far in excess of that which would apply to an equivalent direct investment. Land tax has become a major impost to small to medium business as inner city and coastal property values have rapidly increased in recent years. This penalises businesses that have a large land component. The benefit of capital gain is not necessarily realised because the owner may have no desire to relocate, or may not be able to find a suitable alternate site. Other impacts of land tax include housing affordability. The housing development sector often holds large parcels of land for future subdivision and development. This land is usually taxed at the highest marginal rate. The cost of holding the land is passed on to the consumer in the form of higher house prices. This impacts on overall affordability of housing, particularly for the first home owner. While the Property Council acknowledges the reforms to land tax over the past six years, we believe the Victorian Government is still too dependent on land tax as a source of revenue. The growth in land tax collections over recent years is indicated in the graph below: Victorian Land Tax Revenue is the revised figure, is the budgeted figure $million While there is no doubt the changes to the rate in the dollar have been significant, land tax revenue continues to rise, and is expected to exceed $1 billion for the first time in Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 7 of 35

8 The maximum land tax rate in Victoria is higher than the comparable rates of its two largest regional competitors, New South Wales and Queensland. These high rates are also problematic because aggregation provisions result in owners with multiple properties paying the maximum rate on all properties, rather than on a site by site basis. For example, a property with a site value of $2 million owned on a single holding basis would incur a land tax bill of $12,000. If this property is one of three properties in a portfolio valued at $2 million, the property is effectively taxed at $30,000. The table below illustrates the point: Victorian Land Tax Liability per Property Site Value Number of Properties Land tax bill total Land tax bill per property $2 million 1 $11,975 $11,975 $2 million 3 $92,475 $30,825 While other jurisdictions also have aggregation provisions, their rates in the dollar are much lower. The solution to the aggregation problem in Victoria is to continue to flatten the rate structure, and bring the top marginal rate to 1.5 per cent. This reduction should be considered in priority to reductions in other rates and increases in the tax free threshold. Flaws in the System The land tax system lacks basic equity because it is levied at widely varying rates according to the form of investment. The current system does not impose the highest rates on the wealthiest investors. In fact, the reverse is true because small investors use public investment vehicles which are subject to the highest land tax rates. Some of the key complexities with the Victorian land tax system are: Land tax is assessed on a calendar year basis. This leads to confusion among businesses, which operate in line with their own financial years. In addition, the assessment of land tax on a calendar year basis distorts the Victorian Government s budget planning, which is performed in line with their financial year. Land tax is complex, costly to administer and deserves the continued attention of the Victorian Government because: it reduces the investment returns of Victorian property through costly assessment procedures; the current regime hands other States and countries a competitive edge over Victoria; the absence of a low broad rate breaches the criteria for an efficient, simple tax; it erodes the Government s revenue base through a variety of administrative procedures; land tax is inflationary and adds to the cost of doing business in Victoria a double blow to the Victoria s competitiveness; land tax liabilities filter though to businesses in an inequitable fashion; land tax is inequitable in the sense that only a small proportion of companies pay it. The inequity is then magnified given the lack of a nexus between the owners tax liability and the ultimate incidence on property users; and Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 8 of 35

9 aggregation involves complex administration due to the requirements to assess each land owner rather than each parcel of land. Land tax revenue depends on the economic performance of a highly cyclical industry. It is far from the ideal of providing the state with a predictable growing revenue base. Program for Reform The current structure of six brackets is complex and inequitable. The Property Council seeks a simpler, fairer system with less rate brackets. Further, the top rate of 2.25 per cent must be reduced to ensure competitiveness with other states. The medium term goal for Victoria should be a flat rate of land tax, the same as or below the top rate of its competitors, at which time the impact of aggregation would become irrelevant and the need for costly administration would be eliminated. In 2007 the Property Council, with the cooperation of the Victorian Government, commissioned Access Economics to research the potential for further property tax reform. 2 The Access Economics research assessed: the Victorian economy and budgetary position, relative to New South Wales, Queensland and Western Australia; the affordability of further land tax reform; the affordability for stamp duty on commercial conveyances; and the economic impact of the above reforms. The key finding from the research is that there is considerable scope for major reform in land tax and commercial stamp duty. Access Economics research concludes that, the Victorian economy has a strong budget position and prospect. As a result, there is considerable scope for reform. Modelling by Access Economics demonstrated that a raft of cuts to land tax is affordable and delivers benefits to the state. The Property Council advocates for the top marginal rate of land tax to be reduced to 1.5 per cent. This would bring the top rate below that of New South Wales, creating a competitive business attraction environment. It also lessens the impact of aggregation. The cost of reforming land tax to a top rate of 1.5 per cent is estimated to be $178 million per annum based on 2007 figures. This program moves Victoria towards a competitive land tax system. It is staged to allow for revenue changes. It is expected that revenues from land tax will continue to increase as the next wave of valuations take effect, and we suggest this will increase the pressure on the Victorian Government to take action. The suggested reform will dramatically change the way Victoria is viewed as an investment location: a simplified State tax system will produce multiplier effects across the community. Previous land tax reform has improved the perception of Victoria as an investment destination. Further reform would make Victoria the investment destination of choice. Recommendation 1.1: Commit to moving towards flatter land tax rates by further reducing the top marginal rate to 1.5%. Recommendation 1.2: Change land tax assessment periods and land valuations in line with the financial year to ease the compliance burdens of property owners. 2 Access Economics, Reforming Land Tax and Stamp Duty on Commercial Property in Victoria, Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 9 of 35

10 2. Stamp Duty The Property Council s overarching position on stamp duty on commercial property transfers is that it should be abolished, as agreed in the original intergovernmental agreement (IGA). The Property Council recognises that State Governments across Australia have moved away from this position. Nevertheless, it is an inefficient tax which impedes the flow of capital into Victoria. Combined with GST revenue flows to Victoria, the case for a reform program to phase out stamp duty is strong. Stamp duty is also a significant factor in investment decision making. The Property Council, through its membership, is aware of the barrier and disincentive that stamp duty rates pose to potential investors in property in Victoria, especially real estate investment trusts (REITs). While Victoria s top stamp duty rate is no higher than several other States, it is higher than Queensland, one of our main regional competitors. Furthermore, the progressiveness of the rate scale results in Victoria being the highest taxing state across virtually all property values. Purchase amount Vic $ Tax NSW $ Tax QLD $ Tax $500,000 $25,070 $17,990 $15,925 $1,000,000 $55,000 $40,490 $38,175 $2,500,000 $137,500 $122,990 $116,925 $5,000,000 $275,000 $260,290 $248,175 $10,000,000 $550,000 $535,490 $510,675 Highest Rate 5.50% 5.50% 5.25% Stamp Duty on Commercial Property Transfers Work undertaken in 2007 by Access Economics also assessed the capacity for the Victorian Government to reform stamp duty on commercial property transfers. Access Economics has demonstrated that the Victorian economy is in a strong position to reform stamp duty on commercial property. The Property Council s immediate priority for stamp duty on commercial property reform is to reduce the rate to 4.5 per cent as a down payment for long term reform. A commercial stamp duty rate of 4.5 per cent would be more competitive than New South Wales and Queensland rates. This would give the Victorian investment environment an edge over its interstate competitors. Based on 2007 figures, the cost of the reform is estimated to be $122 million per annum. As discussed earlier, the year on year windfall from property tax revenue demonstrates a case for returning the windfall to the property sector in the form of reform. Our recommendations are not aimed at reducing tax for the sake of reducing tax. The reforms suggested are designed to build on the Commonwealth/State reforms. They are aimed at attracting and retaining increasingly mobile capital in order to promote business activity and the jobs that go with it. One of the Victorian Division s key objectives is to help create a more competitive business environment in Victoria that attracts the capital and talent that fuels business activity. These goals can be best achieved by abolishing or Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 10 of 35

11 reducing those taxes where the removal or reduction of a tax will deliver the greatest economic benefit to the community. Recommendation 2.1: Cut the top rate of stamp duty on commercial property transactions to 4.5 per cent. Recommendation 2.2: The next step is to move to the abolition of stamp duty on commercial property transactions in line with broadening the tax base. (Refer to Section 4: scenarios of National/State cooperation for business tax reform). Potential for National Harmonisation Australia currently has a world leading REIT industry, and has one of the highest percentages of securitised ownership of real estate in the world. However, the REIT market in Australia suffers under a number of regulatory inefficiencies at the state and federal levels. At a state level, the most significant regulatory inefficiencies arise from a lack of uniformity and harmonisation of stamp duty rules around Australia. There are eight fundamentally different taxing regimes which apply to investments by property owners including public and wholesale REITs. Property owners, who operate nationally and/or globally, are exposed to increased costs and complexity. These different regimes directly impact on the ability of the Australian REIT market to compete globally. The Property Council has developed a model which would create national harmonisation of land rich duty provisions and corporate reconstruction relief. Without reforms to put in place similar State land rich and corporate reconstruction stamp duty rules: cross jurisdictional investment will be inhibited for the majority of property vehicles that can t implement complex structures (foreign investors will seek easier investments); investment capital and potential returns will be lost in unnecessary double taxes and costs; Australian property portfolios will be less attractive to investors; and Australia will miss the opportunity to capture a larger share of international capital. There are significant opportunities for the States in adopting consistent land rich and corporate reconstruction stamp duty rules based on best practice: encourage cross jurisdictional investment and increase investment activity; remove duplication of transaction costs; simplified investment across States encouraging more transactions; reduce the need for complex investment structures; increase government revenue from increased number of underlying transactions; and increase our international competitiveness. Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 11 of 35

12 The Issues There are a number of technical issues which arise in relation to the stamp duty laws which build inefficiencies and red tape into the REIT market: there is no common classification of what is a public or wholesale unit trust throughout Australia; often double taxation arises on the establishment of a new REIT and the investment by public/wholesale investors in that vehicle; many REIT vehicles incur significant administrative/legal/accounting costs on determining their status in each Australian jurisdiction for stamp duty purposes; corporate structures cannot be rearranged without incurring significant stamp duty; and there is a lack of uniformity and breadth in the availability of exemptions from duty on reorganisations of land holding groups, preventing efficiencies being gained from restructures which do not change the ultimate beneficial ownership of land. The practical implications of these technical difficulties are that many REITs choose not to invest in particular Australian jurisdictions due to the onerous and restrictive stamp duty rules. Similarly, foreign investors are often deterred from investing in Australian real estate (either directly or through REITs) because of the complex regulatory and taxation regime, as well as the high tax cost of investing in Australian real estate. The main changes to Victorian land rich duty would be: companies and unit trusts would be treated consistently; and a relevant acquisition to be where the significant interest is 50% or greater in the landholder. Recommendation 2.3: To ensure that the Australian REIT market remains a world leader and competitive, stamp duty rules must be rationalised to remove red tape, eliminate double taxation and promote the efficient movement of capital whilst ensuring that the current tax base is protected. Corporate Reconstruction Relief As mentioned above, the Property Council has a national corporate reconstruction relief harmonisation model. In addition to this model, a recent amendment to the corporate reconstruction relief provisions requires further reform. The Property Council supports the Government s decision in 2008 to extend corporate reconstruction relief to certain real estate investment trusts in line with recent changes to Commonwealth Capital Gains Tax relief (CGT). The stamp duty relief will allow these trusts to operate more efficiently and competitively with international markets. This is commonly referred to as the top hatting amendment. While the relief is welcome, it extends only to listed trusts. The Property Council believes this exemption should apply to listed and unlisted entities. The Federal CGT change does not make the distinction, nor does the Western Australian duties legislation. The Property Council strongly advocates for consistency across jurisdictions in this matter. A broad exemption does not pose a revenue leakage issue, as the Federal provisions require ultimate ownership to remain identical. Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 12 of 35

13 Recommendation 2.4: Amend the Duties Act to extend the corporate reconstruction relief to both listed and unlisted trusts in line with the Federal Government Capital Gains Tax relief. Stamp Duty Tax on Tax Effect Wherever possible the Victorian Government should avoid stamp duty and other levies being applied on top of other taxes, levies and charges. For example, the insurance premiums for commercial buildings incur the Terrorism Insurance Levy, the Fire Services Levy and GST before Victoria s stamp duty is applied. This is an unreasonable and unbudgeted windfall and must be addressed, by levying stamp duty on the base building insurance premium rather than the total of all levies and charges. Recommendation 2.5: The Victorian Government must immediately address instances of stamp duty being applied on top of other taxes, levies and charges. Such tax on tax revenue windfalls further entrench the belief that stamp duty is applied in a manner designed to maximise revenue. Where stamp duty is paid it must apply to the base transaction and not to the GST inclusive amount, levies, charges or non base amounts. 3. Payroll Tax Payroll Taxes and Jurisdictional Inconsistencies The Australian Government transferred the then national payroll tax system to the States in Under the control of the Australian Government, payroll tax arrangements were uniform across all jurisdictions. Since then, the States have amended their payroll tax arrangements to cater to their respective needs and demands. As a consequence, State payroll tax arrangements differ in each jurisdiction with regard to: tax rates; thresholds; administration (such as monthly payment date); definition of wages (such as treatment of employee share schemes); contractor provisions; treatment of fringe benefits; exemptions for charities; exemptions for provision of motor vehicles and accommodation; and grouping provisions. There are a number of additional problems with an increase in payroll taxes. Notably, payroll taxes still involve generally poorer performance than the benchmark tax. Reliance on payroll tax increases therefore still involves a tax base with some of the problems of the current mix. Additionally, possibly more than many other taxes, there is considerable tax competition between the States through payroll tax. The States adjust payroll taxes when seeking to attract investment and employment (as well as when responding strategically to incentives under the system of HFE and grants commission processes). One effect of this Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 13 of 35

14 competition is for smaller States to undercut the larger States whenever the larger States cut their tax rate. Over time, the main effect of interstate competition has been to reduce the overall amount of revenue raised from payroll taxes. It is likely that interstate competition in payroll tax would become more intense if this source of tax revenue was increased in absolute terms and in terms of relative importance. It is likely that increased reliance on this tax base will be unstable and unsustainable. A State tax reform that is totally self-funded by the State governments will be difficult to implement. Some problems of this approach can be reduced if the States are able to act in a coordinated way, especially in terms of agreeing to eliminate tax competition in areas such as the payroll tax. This could add to the existing agreement between NSW and Victoria regarding harmonisation of payroll tax regimes. Sharing the Good Tax Bases While some taxes are better than others, the benchmarking results suggest that most of the State taxes are poor taxes. The benchmark tax performs better than all of the existing State taxes because it has a very broad base. It is notable that other Australian Government taxes share the characteristic of having a broad base as well. Reflecting this, other studies have found that income taxes are also better than most if not all of the State taxes. To obtain the best outcomes from tax reform, the focus of change should be upon elimination of the inefficient worse taxes and finding a way to close the gap created by the loss of state tax revenue. Logically, this would involve substitution of the worst taxes with revenue from the best tax bases, which are those of the Australian Government. The purpose in doing so from the Australian Government s perspective would be that reducing state taxes would produce better outcomes for the community than cutting Australian Government taxes. It is difficult to be definitive about the extent of revenue base sharing that the Australian Government can afford. There are pressures upon the budget, including those arising from the crisis in global financial markets which need to be kept in mind. However, the September final budget outcome for shows a modest fiscal improvement reflecting the effects of economic stimulus as well as some one-off factors. The Australian Government general government sector recorded an underlying cash deficit of $27.1 billion (2.3 per cent of GDP) for This outcome was $5.0 billion better than expected at the time of the Budget, reflecting lower than anticipated spending of $2.2 billion and higher cash receipts of $2.8 billion. Importantly, total tax receipts were $3.3 billion above the estimate at the Budget, primarily due to stronger than expected company income tax receipts of $3.6 billion, partly offset by lower than expected personal income tax receipts of $0.5 billion. 3 The Property Council welcomes this budget outcome. Australia s cash deficit relative to GDP remains low, and significantly lower than other OECD economies. This opportunity should be harnessed to further reform inefficient state taxes, which will strengthen the structural position of the Australian and Victorian economies. 3 Australian Government, Final Budget Outcome , Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 14 of 35

15 Harmonisation of the Payroll Tax Regimes: Victoria and NSW. From 1 July 2007, NSW and Victoria introduced harmonised payroll tax legislation and administrative arrangements designed to simplify and reduce red tape. Examples of amendments made to achieve harmonisation are: consistent contractor provisions; changes to fringe benefits and the gross-up rate; consistent charitable exemption provisions; consistent grouping provisions; consistent exemption rates for motor vehicles; and overnight accommodation allowances. The aims of this payroll tax harmonisation project is to support business investment, improve competitiveness and increase productivity by simplifying administration and reducing red tape and compliance costs for businesses that operate in multiple States. As of 1 July 2009, Tasmania, South Australia and the Northern Territory are all fully harmonised with the NSW-Victorian agreement on payroll tax. Queensland also harmonised key aspects of its payroll tax regime with the NSW-Victorian agreement from 1 July While the Property Council of Australia acknowledges this important work, there are ongoing challenges in simplifying the administrative complexities between jurisdictions, and to establish greater clarity on interpretative legislative issues. For instance, will determinations within in one jurisdiction have precedent value in other jurisdictions? Recommendation 3.1: Accelerate the breadth and depth of payroll tax harmonisation between all States with consideration of the NSW Victorian agreement. Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 15 of 35

16 4. Harmonisation: State/National Tax Reform Cooperative Federalism Review of the strategic constraints to substantive State tax reform points to the salient role that cooperation in Federal arrangements needs to play. Essentially, there are three broad themes in co-operative arrangements: cooperation within the States agreement between the States eliminating inefficient taxes and expanding more efficient State taxes; cooperation between the Australian Government and the States where Australian Government taxes (such as GST or personal income tax) are used to replace State tax revenue, or introduction of a State personal income tax or State income tax premium; and combined cooperation a mixture of the preceding two themes. To make the benefits of tax reform more tangible it is helpful to think about specific reform scenarios. Of course there are many State taxes and many possible combinations and permutations involving which taxes to change, which to increase and by how much. To illustrate and communicate effectively some of the key attributes of tax reform it is necessary to be selective. Three basic tax mix scenarios have been prepared to illustrate the potential gains from tax reform. Each scenario shows the effects of a portfolio of investment in tax reform. The reform scenarios have been prepared in consultation with the Business Coalition for Tax Reform (BCTR) project steering group for this study. The Property Council is an active member of the BCTR. 4 Given the focus of the study upon State business tax reform the scenarios deal with the removal or reduction in State business taxes. The State tax reform scenarios selected by the BCTR are intended to illustrate key discussions. They are designed to show that economic performance in terms of improved economic growth or enhanced international competitiveness can be delivered through reform. A further dimension that is important to illustrate is the effect of the scale of reform and how much tax reform we can afford to purchase, given the revenue, debt, and expenditure neutrality constraints. Thus, the more funding we have, the more tax reform can be achieved. All three scenarios reflect funding involvement from the Australian Government. Reflecting general fiscal policy constraints, it is assumed that the Australian Government will only fund up to $10 billion. These funds are then transferred to the States through federal grants. How were the scenarios selected? The change scenarios modelled in this study were selected by the BCTR through a workshop. During this workshop, evidence about the effects of changes was presented to assist the BCTR in making choices about the reform scenarios. The analysis showed that the biggest gains from reform come from replacing inefficient State taxes with more efficient State or Federal taxes. This information assisted the BCTR in selecting the tax mix of the reform scenarios. Analysis of previous tax reform exercises and taxation reviews and of 4 The BCTR is a forum for bringing together the views of the business community on tax reform issues. BCTR members share the common objectives of creating and implementing a better tax system that enhances both international and domestic business competitiveness and fairness and which assists in creating a business climate conducive to investment, growth, job creation and private saving. The BCTR maintains an active interest in the implementation of the New Tax System, tax reform measures and continues to promote understanding of the reasons for further reform and to provide input into the implementation process ( Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 16 of 35

17 constraints to change was presented to assist the BCTR in identifying a strategic approach to reform. A more strategic approach pointed to the following elements of reform: little can be achieved with incremental adjustments in specific taxes on a tax-by-tax basis; reform of significant scale is needed; reflecting many binding constraints, State tax reform has to be revenue, expenditure and debt neutral; and Federal-State cooperation is essential. The Australian Government has access to the better tax bases to replace poor state taxes. State cooperation is also required to improve the contribution that can be made from the State taxes that are efficient and to maintain and preserve efficient revenue sources. Based on the above, the BCTR selected three change scenarios that were directed at shaping key outcomes (raising growth, raising competitiveness and maximising State tax reform). They are revenue, expenditure and debt neutral, incorporated cooperation between the Australian and State governments, involved a reasonably large scale reform (change of roughly $10 to $20 billion) and recognised the fiscal constraints of the current economic conditions. Change Scenario 1: Raising Growth. The main thrust of this scenario is to obtain a boost to economic activity by removing or reducing State taxes that are suppressing it. This is achieved by reducing State taxes that were found to have the higher index scores against benchmark 1 (taxes and growth) until the funds available for reform are exhausted. In this scenario the source of funds is funding from the Australian Government with the constraint discussed above. With only $10 billion funding from the Australian Government, this scenario can afford to reform a few State taxes. Specifically, the scenario of change includes: removal of stamp duty on insurance; and reduction in stamp duty on both residential and non-residential properties. This can be achieved by reducing the rate of those duties. Payroll tax, land tax and stamp duties on motor vehicles remain unaltered. Change Scenario 2: Enhancing International Competitiveness. The target of this scenario is to enhance competitiveness, attracting more investment by removing State taxes that were found to have the higher index scores against benchmark 2 (taxes and competitiveness). These taxes are reduced or removed until the funds available for reform are exhausted. In this scenario the source of funds is funding from the Australian Government with the constraints discussed above. Specifically, change scenario 2 involves: removal of stamp duty on non-residential properties; removal of land taxes; and Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 17 of 35

18 reduction in payroll tax achieved by either lowering the tax rate, or increasing the taxfree threshold, or broadening and reducing the tax rate. In the modelling, the reduction in payroll tax is simulated by broadening the tax base and reducing the tax rate. 5 Change Scenario 3: Maximising State Tax Reform. This scenario illustrates the case where the Australian and State Governments use their combined resources to make the most substantial reductions in the worst taxes. By combining State and Australian Government resources, more reform is feasible than under the other two change scenarios. Consequently, change scenario 3 involves the largest change in State taxes. In this change scenario the Australian Government s contribution is broadly matched by the States contribution to reform. Specifically, change scenario 3 includes: the removal of stamp duty on insurance; removal of stamp duty on both residential and non-residential properties (compared with reduction in tax rates in Scenario 1); reduced land taxes achieved by either lowering the tax rate, or increasing the tax-free threshold, or broadening and reducing the tax rate. In the modelling, the reduction in land tax is simulated by reducing the tax rate; and an increase in revenues raised from a broad based, uniform State tax. Other State taxes remain unaltered. As mentioned before, these scenarios are based on input from the BCTR and are selected to illustrate the impacts of different targets, different tax mix and different amounts of reform. Notably, the tax changes presented reflect the direct costs of the reforms. The gross impact of reform does not account for changes in tax collections that might result from indirect or second round effects (adjustments that occur as the direct impacts of the tax changes which filter through the economy). For convenience, the analysis assumes that the States have access to a low, uniform, broad based tax, and this tax is used to finance the State s contribution to this change portfolio. 5 Stamp duties on residential property, insurance and motor vehicles remained unaltered. Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 18 of 35

19 Change Scenario Objective Source of Funds Proposed Tax Changes (Cost of Reforms) 6 (1) Raise growth Australian Government ($10 billion): reduce stamp duties on residential and non-residential property ($7.5 billion) and remove insurance duties ($2.5 billion). Total change: $10 billion. (2) Enhance International Competitiveness Australian Government ($10 billion): remove stamp duties on commercial property ($4.0 billion); remove land tax ($4.4 billion); and reduce payroll tax ($1.7 billion). Total change: $10 billion. (3) Maximise Elimination of the Worst State Taxes Australian Government ($8.6 billion) and State contribution via a broad state tax ($8.6 billion); remove stamp duties on residential and non-residential property ($12.5 billion); remove insurance duties ($2.5 billion); and reduce land tax ($2.2 billion). Total change: $17.2 billion. 7 Key Points Reform of significant scale is needed - change of roughly $10 billion to $20 billion is required. Reflecting many binding constraints, state tax reform has to be revenue, expenditure and debt neutral. Little can be achieved with incremental adjustments in specific taxes on a tax by- tax basis. A strategic approach must involve change over a portfolio directed at shaping key outcomes. Three illustrative scenarios have been based on guidance from the BCTR. These focus upon raising growth, raising competitiveness and maximising state tax reform. 6 Detailed information and comprehensive analysis can be sourced from: Centre for International Economics (CIE), State Business Tax Reform: Seeding the Tax Reform Debate, This report was prepared for the Business Coalition for Tax Reform. ( 7 All scenarios assume that stamp duties on financial transactions and non-real non-residential property are removed according to the Intergovernmental Agreement timetable. Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 19 of 35

20 Impacts of Scenarios against Objectives = GDP Growth The tax reform scenarios proposed by the BCTR aim to increase economic activity and/or enhance competitiveness (in terms of higher investment). The three change scenarios would generate higher GDP in the long run than would have been the case without tax reform. Scenario 1, which aims to remove impediments to growth, would increase long run GDP by 0.6 per cent. Scenario 2, which aims to remove impediments to investment, increases long run GDP by 0.4 per cent. Scenario 3, which aims to maximise tax reform, has the largest impact on GDP in the long run. Under these tax changes, GDP is 1.7 per cent higher than baseline. In each scenario, the impact on GDP increases over time. In the short run, tax reforms reduce tax and stimulate investment. As Australia imports most of its investment goods, the higher investment leads to higher imports demand. In the first few years, this higher demand for imports would put a drag on GDP. Over time however, higher investment leads to an improvement in the productive capacity of Australia, boosting the economy s output. Recommendation 4.1: The Victorian Government should advocate to other Australian Governments to adopt the BCTR State Tax Reform Model for comprehensive business tax reform. Recommendation 4.2: Australian Governments should commit to a new round of business tax reform in consultation with industry, underpinned by a new IGA. Recommendation 4.3: The Council of Australian Governments (COAG) should; (a) set a timetable to eliminate inefficient business and property taxes with clear performance milestones; (b) commit to a root and branch modernisation of the business tax system; (c) commit to a new system for allocating the GST revenue between jurisdictions; (d) set a five year target to reduce Australian Government reliance on indirect taxes; (e) commit all States and Territories to undertake five yearly reviews of the indirect tax systems with the objective of reducing their reliance on high dead weight taxes and reducing compliance costs. Recommendation 4.4: Australian Governments should ratify a new IGA to give effect to COAG s tax reform program. Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 20 of 35