Property taxes on the up

Property related taxes remain the largest source of revenue for local and state governments. Despite the deteriorating property market conditions in 2010-11 income from property taxes rose to new highs over the 2010/11 financial year.

Over the 2010-11 financial year, state and local governments received more than $33 billion in taxes from property related channels which was a record amount. Property related taxes accounted for 47.3% of all state and local government tax revenue, down from 48.2% over the previous financial year. Despite the softer housing market conditions and ongoing weakness in the commercial property sector, total property related tax revenue increased by 4.6% over the year. This was following a record increase of 14.3% over the 2009-10 financial year.

It is somewhat surprising to see that the total value of property related taxation revenue increased over the year, especially when you consider that the nation’s largest asset class (residential property) recorded weaker conditions. Our data shows that the total value of residential property transactions in 2010-11 fell by -17% compared with the previous financial year. Data also shows that over the financial year capital city home values fell by -1.4% and transaction volumes for homes were -20% lower than over the previous year. So how did State and Local Government possibly lift revenue?

Firstly, it is important to note that the second graph highlights the different categories of tax revenue, their total value and their proportion of all state and local government property related tax revenue. Of each category of taxation there are really three big ticket areas: municipal rates, stamp duty on conveyances and land taxes. These three categories accounted for 93% of property tax revenue last financial year. Over the financial year, all three categories rose with municipal rates rising by the greatest amount (6.9%) followed by land taxes (4.1%) and a relatively minor increase in stamp duty on conveyances (0.3%).

Given that both property values and transaction volumes have fallen, it is clear that stamp duty revenue has felt the effects of the soft housing market conditions. In fact, stamp duty has only risen over the year due to increases in the two most populous states (New South Wales and Victoria). In each other state stamp duty revenue has fallen and in 2010-11 it was 14.1% lower than its record level of $14.3 billion in 2007-08.

Increases in land tax charges and council rates have been the main drivers of growth in tax revenue over the last financial year. Considering that since the end of the 2010-11 financial year property values and transaction volumes have continued to fall, we would expect that in order to grow tax revenue state and local governments may be looking to again increase land tax and municipal rates as there is likely to be limited (if any) growth in stamp duty revenue.

Across each state and territory there were quite varied results in terms of changes to taxation revenue relating to property. The Australian Capital Territory (14.2%) and Victoria (10.7%) recorded the largest increases in property tax collection. On the other hand, the amount of property related tax collected fell over the year in: Western Australia and the Northern Territory (both -9.6%) and in Tasmania (-1.9%).

Across the land tax and municipal rates categories, the amount of land tax collected rose by the greatest amount in Victoria (18.7%) and Australian Capital Territory (12.5%) and fell by the greatest amount in Tasmania (-17.6%) and Western Australia (-0.6%). Municipal rate collection rose by the greatest amount in Queensland (8.6%) and Victoria (8.3%) and recorded the lowest increases in the Northern Territory (3.6%) and New South Wales (4.2%).

Overall, we would expect that the rate of growth in property related tax revenues to remain fairly limited over the coming year. Property tax is clearly the most important source of revenue for state and local governments and as a result it is likely that these governments will look to make adjustments to grow revenue. Most notably, we already know that rates have increased over the year and some changes have been made to land tax calculations. CPI data from the ABS shows that over the first two quarters of the 2011-12 financial year, the property rates and charges housing sub-category has increased by 5.2% across the capital cities. We have also seen stamp duty concessions on the principal place of residence removed by the previous Labor Government in Queensland which was obviously an attempt to capture more revenue.

Considering the soft market conditions over the financial year to date, look for state and local governments to look for other ways to compensate the falls in property related taxes. Potentially this means higher rates of stamp duty or charging a greater amount of land tax / municipal rates.