OPINION: WITH the 2016/17 Victorian Budget set to be handed down, the state government has announced that it intends to dramatically increase the stamp duty and land tax surcharges imposed on foreign investors.
The stamp duty surcharge applicable to foreign purchasers of residential property will more than double from 3% to 7% and the land tax surcharge applicable to absentee owners of all taxable property in Victoria will triple from 0.5% to 1.5%.
The increase in the stamp duty surcharge will result in the stamp duty cost for a foreign purchaser of a $600,000 off-the-plan apartment in Melbourne increasing significantly to approximately $49,000.
By contrast, if the same apartment is purchased by someone who is not a foreign purchaser their stamp duty cost will be approximately $7,000.
The government’s policy settings in relation to these surcharges could have a devastating impact on foreign investment into Victoria, residential development activity by foreign developers and ultimately housing affordability for all Victorians over the medium to long term.
The government seems intent on raising revenue by targeting foreign investors. It’s a trend across federal and state governments at the moment as they try to balance their books while inflicting the least amount of electoral pain.
To this end, on July 1 last year the Victorian government introduced a 3% additional stamp duty on foreign purchasers of residential property in Victoria. And with effect from the 2016 land tax year, the state government also introduced a 0.5% land tax surcharge on ‘absentee owners’ of taxable Victorian land. Now these surcharges are being viewed as a cash cow for the government and they are going to be significantly increased.
Hitting foreign investors with higher stamp duty and land tax charges will over time reduce the level of investment into Victoria.
It remains to be seen how the Victorian economy and the significant inbound flow of property development investment over the last 2-3 years will be affected by these additional surcharges.
As Victoria, and Melbourne in particular, continues to experience significant population growth, it’s critical to have stamp duty and land tax policy settings right to ensure that we can meet the housing supply challenges the future will hold.
Consideration needs to be given to whether the combined effect of these policies will result in a reduction in the amount of residential development activity in Victoria; our fear is that this a genuine possibility.
The state government introduced land tax and stamp duty surcharges on foreign investors on the basis that targeting that category of investors should increase the supply of housing stock available to Victorians, thus lowering prices.
But Victoria’s housing affordability problem is rooted in a lack of supply, which is only set to worsen as our population continues to grow.
Victoria has experienced significant inbound property investment, both residential and commercial, over the last 2-3 years. Residential development demand continues to rise in conjunction with population growth.
With residential development proving an increasingly popular investment vehicle for overseas investors, it would seem counter-productive to indulge in policies that could quite potentially result in making Victoria a less attractive investment destination for foreign capital. Neither New South Wales nor Queensland has an equivalent surcharge regime and with the increases in Victoria’s surcharges, the investment opportunities in those other states could start to look a whole lot more enticing than in Victoria.
Over time, decreased development activity would reduce the level of available stock and ultimately increase prices and decrease housing affordability, thereby rendering meaningless the housing affordability justification proffered up by the Victorian government for its foreign surcharge policy.
In the upcoming state budget, the state government will need to take a hard look at its revenue sources to assist in its program of rolling out much-needed infrastructure upgrades across the state.
We thoroughly support both federal and state infrastructure investment. It’s clear that both governments recognise Victoria’s growth potential, and our hope is that in the upcoming state budget, the Victorian government will continue to invest in critical infrastructure that continues to make Victoria a vibrant, liveable state.
But all the infrastructure investment in the world won’t help Victoria achieve its full potential if our state taxes discourage residential development and investment, and we should be very wary of unduly putting the brakes on development by targeting foreign investors through the higher stamp duty and land tax surcharges.
It’s all too easy for the government to play on public sentiment that foreign ownership of property in Victoria is causing our housing affordability problem.
But the root cause of the housing affordability problem is in fact on ongoing lack of supply of land suitable for residential development. The government should concentrate on getting its planning settings right rather than discouraging foreign developers from investing into residential development in Victoria.
By Craig Whatman, Partner, Pitcher Partners.*
