Tax shake-up attacked, but rates may fall
By Matt Wade
April 8, 2004The State Government’s property tax overhaul has cast a shadow over the housing investment market and raised the possibility that the next move in interest rates will be down.
There was confusion and uncertainty among investors and property experts yesterday as they digested the tax changes in Tuesday’s mini-budget.
The federal Treasurer, Peter Costello, warned that the changes could spark an investor exodus from the NSW property market. “If you pluck the golden goose with too many taxes, people move to other investments.”
Economists also fear a rush of sales as people try to avoid the new 2.25 per cent stamp duty on the sale of investment properties, to be imposed from June 1.
Macquarie Bank’s chief economist, Richard Gibbs, said this could intensify the slowdown in the housing market and increased the chances that the next move in rates will be down. “I can see a conceivable scenario where we are talking about cutting rates by the end of this year.”
JP Morgan’s chief economist, Andrew Pease, said the tax changes had introduced a fresh element of doubt to an already jittery property market. “The degree of uncertainty about the near-term outlook is probably as large as it has ever been because we just don’t know how this housing downturn is going to proceed.”
Real estate agents warned of two extreme outcomes – a rush of sales to beat the new investor exit tax, or sales drying up as investors mulled over the implications of the changes.
The Reserve Bank board announced yesterday that it had left interest rates unchanged after its Tuesday meeting.
The benchmark cash rate has now been set at 5.25 per cent since December and the shaky housing market, stagnant consumer spending and low inflation appear to have pushed a rise off the agenda for now.
Mr Costello accused the NSW Government of pilfering tax relief that the Federal Government had delivered when it halved capital gains tax in 1999.
“The Commonwealth Government cut capital gains tax; that is, we were trying to reduce the tax that people paid on investments and that was to encourage them to save long term. If you encourage them to save, and they have investments, that is going to be good for the ageing of the population. Along comes the NSW Government and tries to claw some of that back with a new tax.”
The Prime Minister, John Howard, branded the NSW move “totally unjust” and “a clumsy and heavy-handed measure”.
The new tax measures will erode Commonwealth revenue because the amount of capital gains tax investors will pay after selling a property will be reduced when they pay the state’s 2.25 per cent exit stamp duty.
As well, investors will be able to add the new state land tax – to be levied on all investment properties – to any tax write-off on a rental property. This will also reduce federal tax revenue.
The president of the NSW division of the Property Council of Australia, Rod Leaver, said the investment industry response to the tax changes was one of “shock, disbelief and outrage”.
Tony Anderson, managing director of Laing and Simmons said: “It’s a similar [sinking] feeling about the place as to when GST was introduced.”
Victoria and Queensland claimed that their revenue would rise as investors were chased interstate by the new taxes, but the ACT said it may have to match the exemption of first-home buyers from stamp duty to avoid losing them to NSW.
“Dont be looking in your back yard for a four leaf clover when the opportunity of a lifetime could be knocking on your front door….”
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