Land tax in australia fiscal reform of sub national government

LandTaxinAustralia

LandTaxinAustraliadefineshowlandtaxoperatesandisadministeredacrossstateandlocal
governmentinAustralia.InternationalexpertVinceMangionireviewsthecurrentstatusand
emerging trends in these taxes in Australia and compares them with the UK, USA, Canada,
Denmark and New Zealand. Using substantial original research, the author sets out what
Australiamustdothroughpracticeandpolicytoreformandbringthistaxintothetwentyfirstcentury.
The need for fiscal reform and strengthening the finances of Australia’s sub-national
governmentislongoverdueandiskeyinreformingAustralia’sfederation.Thesereformsaim
tominimisethetaxpayerrevoltsencounteredinpreviousattemptsatlandtaxreform,while
improvingtaxeffortinlinewithotheradvancedOECDcountries.
This book provides an essential resource for all property professionals working in
development, valuation, law, investment, as well as accountants, tax economists and
governmentadministrators.Itishighlyrecommendedforstudentsstudyingproperty,taxation,
legalandsocialsciencecourses.
VinceMangioniisAssociateProfessorattheUniversityofTechnologySydney,Australia.He
isaninternationallyrecognisedexpertonrecurrentlandandpropertytaxationandfrequently
speaksatinternationalconferencesandindustryworkshopsonthissubject.


“Recurrent property taxes are a very important source of revenue used to support the
provision of local services in many countries around the world. However, they are often
unpopularandcanbecontroversial.Partofthereasonfortheirunpopularityisthattheyoften
lacktransparencyandarefrequentlymisunderstoodbothbythosewhoarecalledupontopay
thetaxandbythepoliticianswhoareresponsibleforthepropertytaxsystem.Atthepresent
time,landtaxinAustraliaisverymuchintheheadlinesandthesubjectofdebatebothlocally
and nationally; there is considerable pressure for reform of land tax, but there is also
significantresistance.IamverypleasedthereforethatVinceMangionihaswrittenthisbookto
assist in clarifying the key issues and providing international case studies that will assist
policy-makersandthepublicinunderstandingandmodernisingthecurrentlandtaxsystemin

Australia.”
–PaulSandersonJPLLB(Hons)FRICSFIRRV,President,InternationalPropertyTaxInstitute


LandTaxinAustralia
Fiscalreformofsub-nationalgovernment
VinceMangioni


Firstpublished2016
byRoutledge
2ParkSquare,MiltonPark,Abingdon,OxonOX144RN
andbyRoutledge
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©2016VincentMangioni
TherightofVincentMangionitobeidentifiedasauthorofthisworkhasbeenassertedbyhim
inaccordancewithsections77and78oftheCopyright,DesignsandPatentsAct1988.
Allrightsreserved.Nopartofthisbookmaybereprintedorreproducedorutilisedinany
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AcataloguerecordforthisbookisavailablefromtheBritishLibrary
LibraryofCongressCataloging-in-PublicationData
Mangioni,Vincent,author.
LandtaxinAustralia:fiscalreformofsub-nationalgovernment/VincentMangioni.
  pagescm

 Includesbibliographicalreferencesandindex.
 1. Landvaluetaxation—Lawandlegislation—Australia. 2. Realpropertytax—Lawand
legislation—Australia. 3. Realpropertyandtaxation—Australia. I. Title.
 KU2830.L36M362016
 336.220994—dc23
 2015023187
ISBN:978-1-138-83125-4(hbk)
ISBN:978-1-315-73666-2(ebk)
TypesetinBaskerville
byApexCoVantage,LLC


Contents

Listoftables
Listoffigures
Acknowledgements
Abouttheauthor
Overview
Bookstructure
Termsandacronyms

Part1
Statusquoandtheevolvingchallenge
 1 AdvanceAustraliafair
Introduction
StructureofgovernmentandevolutionofAustralia’staxsystem
Inquiriesintotaxreformandgovernmentexpenditure
Taxreformsofthelate20thandearly21stcenturies
Taxationdesignandeconomicreform

Summary
 2 Evolutioneconomicsandstatusquooftaxingland
Introduction
Economicsoftaxinglandandtheurbanchallenge
Landtax:fromsettlementtothepresentinAustralia
Landtaxrevenuetrendsandprinciplesofgoodtaxdesign
Summary

Part2
LandtaxassessmentandadministrationinAustralia
 3 Definitionsandbasesofvalue
Definitionsofvalue
Basesofvalue


Australianbasesofvalue
Summary
 4 Valuationoflandandassessmentoflandtax
Introduction
Researchmethodandrationale
Researchmethod–simulations
Residentialsimulation
Retailsimulation
Residential/retailcomparison
Summary
 5 Principalplaceofresidence
Introduction
Datamatchingorreform
Theneedforfiscalreform
NewSouthWales–definingtheprincipalplaceofresidence

Queensland–definingtheprincipalplaceofresidence
Victoria–definingtheprincipalplaceofresidence
SouthAustralia–definingtheprincipalplaceofresidence
Tasmania–definingtheprincipalplaceofresidence
WesternAustralia–definingtheprincipalplaceofresidence
 6 Businessuse,investmentanddevelopmentland
Introduction
NewSouthWales(NSW)
Queensland
Victoria
SouthAustralia
Tasmania
WesternAustralia
NorthernTerritory
AustralianCapitalTerritory
 7 Objections,appealsandenforcement
Introduction
NewSouthWaleslandvalues–objectionsandappeals
Victoria
Queensland


SouthAustralia
Tasmania
WesternAustralia
NorthernTerritory
AustralianCapitalTerritory(ACT)
Summary

Part3

Recurrentlandtaxation–internationalcasestudies
 8 UnitedStatesandCanada
Overview
UnitedStates
Summary
Canada
 9 UnitedKingdom–EnglandandIreland
Overview
England
Ireland
Summary
10 Denmark
Reformofsub-nationalgovernment
Anevolvingfinancepathandequalisationsystem
Roleoflandandpropertytaxation
Currentlandandpropertytaxation
Operationoflandandpropertyvaluetax2001/02to2014
Taxfreezeforpropertyvaluetax
Ceilingonbuyingandsellingproperty
Limitingpropertyvaluetaxrisesfromyeartoyear
Strengthsofthelandandpropertytaxsystem
Challengesofthelandandpropertytaxsystem
Optionsforreformin2015/16andbeyond
Summary
11 NewZealand
Overview
NewZealand’staxsystemandtaxmix


Localgovernment

Landandpropertytaxation
Basesofvalue
Objectionstovaluations
Summary

Part4
Reforminglandvaluetaxationandfiscalreformofsub-national
governmentinAustralia
12 Reformingrecurrentlandtaxunderthestatusquo
WhatislandtaxinamodernAustraliantaxsystem?
Landtaxreformunderthestatusquo
Basesofassessinglandtaxes
Theemergingvalueandratingphenomenon
Summary
13 RealigningAustralia’staxsystem
Introduction
Propertytaxreformandhousingmobility
Recurrentlandtaxreform
AmodernAustraliantaxframework:top-downandbottom-upreform
Whichtierofgovernmentshouldlevyrecurrentlandtax?
Conclusion
Wheretogofromhere
References
Index


Tables

1.1 RankingasapercentageoftaxtoGDP2010
1.2 Percentageshareoftaxationrevenuebysphereofgovernmentoverpasttwodecades

1.3 Taxcollectedbycentralgovernment
1.4 Incometaxratesandthresholdcomparison
2.1 Evolutionandstructureofgovernmentandpropertytax
2.2 Concessionsforpensionersandfirsthomebuyers
2.3 Localratesandstatelandtaxasapercentageoftotalrevenue,2008–09
2.4 Globaltrendsinlandtaxrevenues
2.5 Recurrentlandtaxexpenditure2013
2.6 Changeinlandtaxrevenueaspercentageoflocalgovernmentraterevenue2001–2012
3.1 Basesofvaluebylevelofgovernment
3.2 BasesofvalueacrossAustralia
3.3 Valuevevidenceofvalue
3.4 Valuationfrequencyandprovider
4.1 Simulationandsurveyresponserate
4.2 Participantrepresentativenessofcompletedresponses
4.3 Residentiallandsimulationsummary
4.4 10FictionStreet–changeinstandarddeviation
4.5 10FictionStreet–changeinmeanvalue
4.6 15FictionStreet–changeinstandarddeviation
4.7 15FictionStreet–changeinmeanvalue
4.8 20FictionStreet–changeinstandarddeviation
4.9 20FictionStreet–changeinmeanvalue
4.10 Salesanalysisandlandvaluesummary
4.11 Standarddeviationcomparativeanalysis
4.12 Retaillandsimulationsummary
4.13 15MainStreet–changeinstandarddeviationaspercentageofmeanvalues
4.14 15MainStreet–percentagechangeinmeanvalue
4.15 5BankRoad–changeinstandarddeviationasapercentageofmeanvalues
4.16 5BankRoad–changeinmeanvalue
4.17 20MainStreet–changeinstandarddeviationaspercentageofmeanvalues
4.18 20MainStreet–changeinmeanvalue

4.19 Retailsalesanalysissummary
4.20 Summaryofstandarddeviationcomparison
4.21 Residentialandretailstandarddeviationcomparison
5.1 EvolutionoflandtaxandthePPR
5.2 Applicationofprincipalplaceofresidenceexemption
6.1 Landtaxthresholdsandratesinthe$1.00
7.1 Investmentpropertyrelativetolandtaxthresholds
8.1 DeterminationofapropertytaxbillNYC(Class1andClass2property)
8.2 Appraisertoappraisalratio–BritishColumbia
8.3 Propertytypeandnumbers–Toronto
9.1 Valuebandsandtax2013–14
10.1 RecurrenttaxesinDenmark
12.1 Focusgroupcomposition
12.2 ComparisonbetweenstatelandtaxandlocalgovernmentratinginAustralia
12.3 ComparativeanalysisandratingrestructurerelativetotheSuttonPrinciple
12.4 MethodsavailableforapplyinglocalgovernmentratinginNSW
12.5 Indicativepercentageoflandtoimprovedvalue
12.6 Applyingthebasesofvalue
12.7 Valuation/Assessmentfrequency
13.1 HoldingperiodsofhousingacrossthecapitalcitiesofAustralia
13.2 Concessionsforpensionersandfirsthomebuyers
13.3 Commonwealthfundingoflocalgovernment


Figures

1.1 Taxmixbycategoriesoflabour,consumptionandcapital
1.2 Top10taxesbyrevenue

2.1 Landdemandandsupplycurve
2.2 Landtax,councilrateandconveyancestampdutyrevenuecomparison
2.3 Landtaxandtaxdesignprinciples
2.4 Conveyancestampdutyandtaxdesignprinciples
2.5 Relativitybetweenincomeandnetwealthoverataxpayer’slifecycle
3.1 Landtaxbases
3.2 EvolutionoflandvalueasabaseinNewSouthWales
4.1 EvolutionofvalueintheSydneyBasin
4.2 Initialresidentialsimulationresults
4.3 Revisedresidentialsimulationresult
4.4 Land–initialvrevisedsimulationmeancomparison
4.5 Improvements–initialvrevisedsimulationmeancomparison
4.6 Land–initialvrevisedsimulationmeancomparison
4.7 Improvements–initialvrevisedsimulationmeancomparison
4.8 Land–initialvrevisedsimulationmeancomparison
4.9 Improvements–initialvrevisedsimulationmeancomparison
4.10 Initialsimulationresults
4.11 Revisedsimulationresults
4.12 Land–initialvrevisedsimulationmeancomparison
4.13 Improvements–initialvrevisedsimulationmeancomparison
4.14 Land–initialandrevisedmeanandstandarddeviationcomparison
4.15 Improvements–initialandrevisedmeanandstandarddeviationcomparison
4.16 Land–initialandrevisedmeanandstandarddeviationcomparison
4.17 Improvements–initialandrevisedmeanandstandarddeviationcomparison
11.1 AgedistributioninNewZealand
13.1 Currentandfuturetaxcollectionconcepts
13.2 Landtaxcollectionandreallocationmodel
13.3 Currentlandtaxsystemandproposedtransitionalreformframework

Acknowledgements

A special acknowledgement and note of thanks is extended to the Australian Property
Institute(API)fortheirsupportinundertakingthisresearch.TheNewSouthWalesDivision
was instrumental in the valuation research comprising the simulations and focus groups in
Parts 2 and 4 of this book. A note of thanks is extended to the National Office for their
encouragementandsupportoftherecognitionthatlandandpropertytaxreformwillmakeas
partofthebroadertaxreformsofAustralia.

Acknowledgementisextendedtothefollowingpeoplefortheirassistanceandsupport:
AssociateProfessorGarrickSmall,CentralQueenslandUniversity
ProfessorKaukoViitanen,AaltoUniversity
ProfessorFrancesPlimmer,UnitedKingdom
ProfessorNeilWarren,ProfessorofTaxationUNSW
DrMargaretMcKerchar,(ProfessorofTaxationUNSW–Retired)
ConnieFair,BritishColumbiaValuationsCanada
LarryHummel,MPacTorontoCanada
PaulSanderson,PresidentInternationalPropertyTaxInstitute
ChrisBennett,InternationalAssociationofAssessingOfficers
DepartmentofFinanceNewYork
LosAngelesCountyAssessor’sOffice
ProfessorHeatherMacDonald,SchoolofBuiltEnvironmentUTS
ProfessorDesleyLuscombe,FacultyofDesignArchitectureandBuilding
AssociateProfessorRobertaRyan,CentreforLocalGovernmentUTS
RobertMangioni(lawyertothestars)
MinistryofTaxationDenmarkSkat
MinistryofTaxationFinlandSkat
RoyalInstitutionofCharteredSurveyors

Valuers-GeneralofAustraliaandNewZealand
(Inparticular:NeillSullivan,VGofNZandPhilWestern,formerVGofNSW)
Aspecialthankyoutomyfamily:Antonella,ZacharyandPhilippa


Abouttheauthor

DrVinceMangioniisanAssociateProfessorinPropertyEconomicsandDevelopmentinthe
SchoolofBuiltEnvironment,FacultyofDesignArchitectureandBuildingattheUniversityof
TechnologySydney(UTS).Hisresearchfocusesonlandtaxandtheroleitplaysinfinancing
stateandlocal(sub-national)governmentinAustralia.HisPhDisintaxationandfocuseson
theratingandtaxingofland,andhissubsequentresearchfocusesonthefiscalreformofsubnational government. Vince was an advisor and presenter to Australia’s Future Tax System
(2010),alsoknownastheHenryReview,onstatelandtaxandlocalgovernmentratingand
wasinvolvedinthereviewoftheratingandtaxingoflandinQueensland.Heisastatutory
valuerandundertookhistrainingattheNSWValuer-General’sOfficeduringthe1990sinthe
ratingandtaxingofland.
Vince has published widely, both nationally and internationally, on land and property
taxationandhasbeenavisitingfellowattheAustralianSchoolofTaxation(Atax),UNSWand
avisitingresearcherattheSchoolofRealEstateandSurveying,AaltoUniversityHelsinki.He
hasreviewedratingandtaxingsystemsinternationally,includingthoseinDenmark,Finland,
New Zealand, Canada and the United States. He has consulted with leading tax economists
and local government experts at OECD World Headquarters Paris, in reviewing the reemerging importance of recurrent land taxation for sub-national government in Europe
followingtheGlobalFinancialCrisis.VincehasconsultedtolocalgovernmentinNewSouth
Wales and Victoria in reviewing and advising on rating systems and assessing their
contributiontothefinancialsustainabilityoflocalgovernment.Heisanassociateresearcherat
the Centre for Local Government and Centre for Contemporary Design Practices at the
UniversityofTechnologySydney.


Overview

The emphasis of this book is on the fast-emerging need for tax reform in Australia and the
contributionlandtaxshouldmakeaspartofthetaxreformagenda.Thisbookpositionsland
tax within the broader tax system, brings forward the need to consider the framework in
which this tax operates and opens the debate for de-siloing the tax system. While vertical
fiscalimbalanceisputforwardasoneofthekeyplanksofreform,theoverridingemphasisis
that, as a low tax country, Australia must improve its overall tax effort, of which recurrent
landtaxationisoneofthekeyareaswhichmustcontributetothisreform.
Debatenowbuildsoverwhichindividualtaxesshouldcontributemorethetotaltaxtakein
Australia.WhilemuchfocusisdirectedtowardstheGoodsandServicesTax,aconsumption
basedtax,therehasbeenlittlefocusonthetaxationofcapitalandinparticularland,which
must equally contribute to the tax reform agenda. As a sub-national (state and local)
government tax, Australia has significant room to improve revenue from this source in
bringingthistaxinlinewithotheradvancedOECDcountries.Ratherthanalltheheavylifting
of tax reform incumbent on the Commonwealth, sub-national government has capacity to
contributetotaxreformfromthebottomupthroughmodernisingitsrecurrenttaxonland.
Thereformoflandtaxasproposedinthisbookwillencouragereorganisationandreform
theadministrationofthistaxacrossstateandlocalgovernmentinAustralia.Whiledebatehas
recentlycentredonconstitutionalrecognitionoflocalgovernment,thegreaterimperativeis
managingthelimitationsthestatesimposeonlocalgovernmentrevenueraisingcapacityfrom
landtax.Atpresent,thestatesareunabletoevolveandreformtheirownrecurrentlandtax
due to its salience, while revenue from this source at the local government level varies
significantlyacrossAustraliaand,inparticular,itscapitalcities.
International case studies are used to demonstrate how land tax has been used through
earmarkingtoeducationintheUnitedStatesandCanada,towhichasimilarrationaleinthe
earmarkingofthistaxtoinfrastructureisanoptionforAustralia.Theseexamplesshowhow
recurrentlandtax(referredtoasthepropertytax)internationallyhasbeendivestedtolocal
governmentinbothunitaryandfederatedstructuresinadvancedeconomiesoftheworld.Itis
demonstratedthatatthestatelevelinAustralia,statelandtaxappliestoanarrownumberof
taxpayersandproperty,thatthegoverninglegislationisover-focusedonhowtomanagethe

vast exemptions, concessions and allowances, which have distorted the efficiency and
robustnessofthisrevenuesource.
TheneedtomoderniseAustralia’staxsystemhasneverbeengreaterandisneededtobring


Australia’staxsystemintothe21stcentury.Focusmustcentreonalignmentofgovernment,
taxeffortandreforminganumberofkeytaxesofwhichrecurrentlandtaxiscentral.Thereis
noonesingletaxreformfixforAustralia,butaraftofreformsareneeded,ofwhichthisbook
addresses one of the important tax policies. Some readers will find the recommendations
madetobeabrutalassaultonthegreatAustralianicon,theprincipalplaceofresidenceand
onresidentialpropertyingeneral.Thisicon,however,escapescapitalgainstax,statelandtax,
conveyance stamp duty on inter-generational transfer, and in some states is subject to rate
cappingandpegging,resultinginamanifestlylowtaxcontributionfromthissource.
Insummary,thebookultimatelymakesitscontributionthroughacritiqueoflandtax,how
itiscurrentlyadministered,themanifestlypoorcontributionitmakestoAustralia’staxeffort
andthemethodsusedtoassessthistax.Inconclusion,itprovidesaframeworkforchangeand
makes a number of key recommendations for the reforms needed to bring this tax into the
21stcentury.


Bookstructure

Part 1: Examines the evolution of property tax policy in Australia post the 1970s and the
emergingdirectionoverthenextthreedecades.Emphasisisplacedontheneedtoraisemore
revenuefromefficienttaxessuchasrecurrentlandtax,whilereducingmobilitytaxeswhich
includestampduty.Thesetaxesareconsideredbarrierstoenteringthepropertymarketand
impactdecisionstotradeupanddown,particularlyinthehousingmarket.Itfurtheraddresses
howinfrastructurewastheinitialrationalefortheimpositionofthistaxandhowagainthisis
the focus for earmarking revenue from this source. This section provides important historic
trends and the fast-emerging trajectory of this tax and revenues within Australia and, to a

limitedextent,abroad.Itlaysthefoundationunderpinningtherationaleforrecurrentlandtax
reform.
Part2:Reviewstheoperationoflandtaxation(stateandlocalgovernment)andthebases
onwhichthistaxisassessedacrossthestatesandterritoriesofAustralia.Itcritiquescasesand
responsesinthereviewoflandtaxesandaddressestheemergingchallengesinthevaluation
of land in each state used to assess the tax. It addresses the operation and administration,
concessions,allowancesandexemptionsfromlandtaxacrosseachjurisdiction.Itdemonstrates
the distortionary impact of the current two-tier land tax system in Australia, which is
supported by vast statutory and administrative frameworks which govern these. It further
shows how many of the well-intended concessions are now outdated and require prompt
reform. The emerging direction of local government rating is analysed, with emphasis on
more densely populated agglomerations. It demonstrates the emerging rifts between
ratepayersofsingledwellingsversusthoseinmulti-unitdevelopmentinsomestates.Thispart
ofthebookisofspecificimportancetotaxpractitioners,includinglawyers,accountantsand
valuers who are engaged by both property owners as well as those commissioned by
governmenttoadministerthetaxandvaluationsystems.
Part3:Examinestheapplicationoflandtaxesabroadthroughaninternationalcomparison
of the operation of land and property taxes and the valuation processes in several countries
which still tax land among other bases on which this tax is assessed. This provides an
importantbasisforAustralianpolicymakers,taxeconomistsandgovernmentadministrators
inunderstandinghowthistaxandvaluationsystemsoperateabroad.Itsetsoutfactorswhich
have precipitated tax revolts and subsequent reforms resulting in a more efficient design of
propertytaxpolicyinternationally.Whiledifferentcountries’taxsystemsareuniquetotheir
circumstances, having evolved over many centuries, this comparison assists in analysing the


technical and operational aspects of land and property taxation. It provides a basis for
understandingwhatworksandwhatneedsreform,andhowcountrieshaveandarecurrently
respondingtotheneedforlandtaxreform.
Part4:Thebookconcludesbydefiningtheimportantemergingdirectionoflandtaxation

andthelooming policy decisionsconfrontinggovernment.The design requiredto maximise
revenuefromrecurrentlandtax,whileachievinggreaterharmonisationanduniformityacross
jurisdictionsofAustralia,isacomplexworkinprogress.Thispartlinkskeyelementsofthe
three previous parts in designing principles, policy and practices required in modernising
recurrentlandtaxinAustraliainthe21stcentury.WhileParts2and3highlightthedisparities
oflandtaxacrossAustraliaandtheadministrationandapplicationofthistaxabroad,Part 4
sets out two options for reform. The first option is the minimalist reform, which addresses
factors which are not negotiable. The second and more fundamental option commences the
debate for reform by de-siloing tax from the tiers of government. This allows a more
purposeful account of revenue subsidiarity between the Commonwealth and sub-national
government, while the reform of sub-national government revenue is introduced and
transitionedoverthenextdecade.


Termsandacronyms

Acronyms
ABS
AFTS
API
COAG
FHOG
GDP
GST
LGA
OECD
VFI
Terms
FiscalFederalism
Central/National

government
Highestandbestuse
Sub-national
government
Recurrentlandtax
Valuer

AustralianBureauofStatistics
Australia’sFutureTaxSystem
AustralianPropertyInstitute
CouncilofAustralianGovernment
FirstHomeOwnersGrant
GrossDomesticProduct
GoodsandServicesTax
LocalGovernmentArea
OrganisationforEconomicCooperationandDevelopment
VerticalFiscalImbalance
Thecollectionandcontroloftaxrevenue bycentralgovernment
Commonwealthgovernment
Usethatisphysicallypossible,financially feasible,maximally
productiveandlegallypermissible
Stateandlocalgovernment
Localgovernmentcouncilratesand stateslandtax
Appraiserorcharteredsurveyorwho determinesthevalueofland
forlandtax


Part1

Statusquoandtheevolvingchallenge

 1 AdvanceAustraliafair

Introduction
Governments use tax policy to fund the delivery of essential services to the public, the
provision of infrastructure either directly or through private public partnerships, and for the
broadereconomicimperativeofshapingandinfluencingdriversoftheeconomy.Incontrast
to the use of monetary policy, which may have broader implications for investment and
economic growth, fiscal alternatives through well-designed tax policy are used by intuitive
governmenttoachievesustainablepublicpolicyandbenefitsfortheelectorate.
Overthepasttwodecades,taxationhasbecomemorecomplexandhasevolvedtotakeon
a number of new forms in Australia. These include taxes on consumption in the form of a
goods and services tax (GST) and, more recently, the inclusion of carbon price mechanisms,
prior to which capital gains and a raft of transaction taxes, in the form of stamp duties,
evolved.Whilethelattertaxhasoperatedforseveralyears,itseconomicimpacthasevolved
into a mobility tax, creating a lock-in effect on housing and acting as an inhibitor for those
attemptingtoenterthehousingmarket,aswellasthosewishingtotradeeitheronthewayup
oronthewaydowninthehomeownershipcycle.
Asinterestinfiscalpolicygainedmomentumduringthebeginningofthe21stcenturyand
prior to the Global Financial Crisis, the Commonwealth commissioned an international
comparison of Australia’s taxes, benchmarking our taxes against other countries (Hendy &
Warberton2006).ThestudyprovidesacomprehensivesnapshotofwhereAustraliarankedon
the OECD world stage at that point. In summary, the study showed Australia to be a lowtaxingcountryamongtheOECDeconomiesonthemeasureoftaxeffortasapercentageof
GDP; however, on a tax per capita basis it sits around the OECD average. The report
highlightsthat,whiletheoverallmixbetweendirectandindirecttaxisbroadlyinlinewith
otherOECDcountries,thecompositionofAustralia’sfinegraintaxmixdiffers.Thestatusof
Australia’srankingamongOECDcountriesisshowninTable1.1.
Table1.1 RankingasapercentageoftaxtoGDP2010

Country
Denmark
Sweden
France
Belgium

TotalTax:GDP
47.6
44.2
44.07
44.06

WorldRanking
 1
 2
 3
 4


Australia
Korea
UnitedStates
Chile
Mexico
OECDAverage

26.51
25.91
24.1
21.21

19.72
34.12

30
31
32
33
34

Source:OECDTaxStatistics2010

ItisstatedthatAustralia’sindirecttaxdifferswithlowervalue-addedandsalestaxesand
reliesmoreheavilyonpropertytransactiontaxes,ofwhichthelatterisimposedandcollected
bythestates.ItisfurtheraddedthatAustraliadoesnotlevyanywealth,estateinheritanceor
gifttaxes.Itisdemonstratedlater,inChapter2,thatadistinctionexistsinwhatisreferredto
as‘propertyandtransactiontaxes’andthatrecurrentlandtaxesarelowinAustraliaamong
theadvancedOECDeconomies,whileincontrast,itistransactiontaxesonpropertythatare
high.
It is demonstrated that recurrent land tax in Australia is low compared with advanced
OECDeconomiesandthatopportunityexistsforAustraliatoimproveitstaxeffortfromthis
sourcewhilereducinglessefficienttransactiontaxationonproperty.Itisfurthershownthat
Australia’sduallandtaxsystem,whichoperatesatthelocalandstategovernmentlevels,has
thecapacitytoberecalibratedandexceedthetaxrevenueforegonefrompotentialreductions
inconveyancestampduty.TheduallandtaxsystemwhichcurrentlyoperatesinAustraliais
uniquecomparedwiththoseabroad,and,withtheencouragementandinitialinvolvementof
centralgovernment,Australiaisinapositiontoreformitsoutdatedmixoflandandproperty
taxes.
In summary, the transformation of Australia’s tax system is not the sole responsibility of
central government to reform; however, central government plays an important financial
mentoring role in assisting sub-national government reform itself. It further has the role in

aidingtherestructureoftheAustralianFederation,justasthestatesplayedtheirrolein1901
whentheyelectedtofederate.

StructureofgovernmentandevolutionofAustralia’stax
system
Australia is a federated structure of government comprising six states, two territories and
more than 500 local governments. The three-tier system of Australian government is an
outcome of Federation in 1901, when the six British colonies – New South Wales, Western
Australia, Queensland, Victoria, South Australia and Tasmania – united to form the
Commonwealth of Australia. Up until the 1850s, each colony was run by a non-elected


governorappointedbytheBritishParliament.
By 1860, all the colonies, apart from Western Australia, had been granted partial selfgovernmentbyBritain(WesternAustraliabecameself-governingin1890).Eachhaditsown
writtenconstitution,parliamentandlaws,althoughtheBritishParliamentretainedthepower
tomakelawsforthecoloniesandcouldoverrulelawspassedbythecolonialparliaments.By
the end of the 19th century, many colonists felt a national government was needed to deal
withissuessuchasdefence,immigrationandtrade(CommonwealthAustralia2014).
ForFederationtohappen,itwasnecessarytofindawaytounitethecoloniesasanation
with a central or national government, while allowing the colonial parliaments to maintain
their authority. The Australian Constitution, which sets out the legal framework by which
Australiaisgoverned,resolvedthisissuebygivingAustraliaafederalsystemofgovernment.
Thismeanspowerissharedbetweenfederalandstategovernments.
State parliaments are subject to the national constitution as well as their own state
constitution. A federal law overrides any state law inconsistent with it. In practice, the two
levels of government cooperate in many areas where states and territories are formally
responsible, such as education, transport, health and law enforcement. Income tax is levied
federally, and debate between the levels of governments about access to revenue and
duplicationofexpenditurefunctionsisaperennialfeatureofAustralianpolitics.
In 1992 the federal government established the Council of Australian Governments

(COAG),whichincludestheprimeminister,statepremiers,chiefministersandthepresidentof
the Australian Local Government Association. COAG meets twice a year to discuss
intergovernmental matters of which tax reform is a work in progress. Its objective is to
develop and implement national policy reforms requiring cooperative action between the
three levels of government: national, state or territory and local. In furthering the
development of local government, in 2008 the federal government set up the Australian
Council for Local Government so that it could work directly with local government
(CommonwealthAustralia2014).
Althoughafast-evolvingtierofgovernment,localgovernmentsarecreatedbylegislation
atthestateandterritorylevelandarenotaconstitutionallevelofgovernment.Theydonot
have tax-raising powers of their own; all tax-raising powers and planning decisions are
controlledandareatthediscretionofstategovernmentacrossAustralia.Referendawereheld
in1974and1988toprovideconstitutionalrecognitiontolocalgovernment,whichbothfailed
(Pearson1994).Incontrasttoitstraditionalroleofroads,ratesandrubbish,localgovernment
isprogressivelymovingintohousing,earlyeducationandhealthservices.
Thechallengeconfrontingstateandlocalgovernmentrelationsontaxationresemblesthose
confronting state and commonwealth government 60 years earlier as the Commonwealth
asserteditsdominanceontaxpolicyduringWorldWarII.Thestatesareacutelyawareand
remember their battle with the Commonwealth 40 years after Federation on income tax


revenue as an own tax revenue source. The states do not want to repeat this exercise with
local governmentbygrantingconstitutionalrecognitionandwrestlingoverthelimitedown
sourcetaxesavailabletosub-nationalgovernmentinAustralia.
BeforeWorldWarII,boththeCommonwealthandstategovernmentcollectedincometax.
In1942,inordertofundthewareffort,thefederalgovernmentbecamethesolecollectorof
incometax.Itdidthisbypassinglawswhichraisedthefederaltaxrateandgavesomeofthe
proceedsbacktothestatesontheconditionthattheydroptheirincometax.Statesreceivethis
moneyintheformoffundinggrants.Technicallyastatecouldstillcollectitsownincometax,
butthiswouldmeanitspeoplewouldbetaxedtwiceandthestatewouldforfeititsfunding

grants. Warren (2004) highlights the consequences of state government maintaining income
taxesatthatpoint,whichresultedinadollarfordollarreductioningrantrevenuetothestates
fromthecommonwealthforeverydollarofincometaxtheycontinuedtoraise.
Fourstates–WesternAustralia,Victoria,SouthAustraliaandQueensland–challengedthe
legislationallowingtheCommonwealthtocollectincometaxes.TheHighCourtruleditwas
valid on the grounds that section 51 (ii) of the Constitution gives the Commonwealth
Parliament power to make laws relating to taxation, even though in practice the legislation
removed a state power. It also ruled that, under section 96 of the Constitution, the federal
governmentcouldattachconditionstofundinggrants,andthereforeitwaslegaltoonlygive
compensationtostatesthatstoppedcollectingincometax.Intendedasawartimemeasure,the
arrangementhasremainedinplaceeversince.Asaresult,thestatesarenowmoredependent
onfederalgovernmentfundingfromgrants.
Australiaisayoungandmodernnationwithasmall,strongandevolvingeconomyandan
egalitarian society which prides itself on equality and the well-being of the community.
TaxationisimportanttoAustraliansand,inadditiontosimplyfinancingthecountry,itisan
important mechanism for ensuring a contribution is made for earning and prosperity. The
unification of Australia under a federated structure centralised financial control and the
overarching management of the nation with the Commonwealth by achieving a consistent
andharmoniousapproachtotaxation.
GovernanceandoversightofthetaxsystembythenewlyformedCommonwealthwasan
importantcornerstoneofFederation,whichallowedtaxrevenueequalisationanddistribution
acrossAustralia.ThisobjectiveservedAustraliawellthroughtheearlyandmid-20thcentury
andinparticularduringbothWorldWars,wheremigrationtothecitiesandfinancingthewar
effortwerewellcoordinated.DuringtheinitialurbanisationphasesofAustralia’scapitalcities,
population growth followed each of the World Wars and fiscal federalism achieved its
objectivesinaddressingtheneedsofafast-evolvingandgeographicallycentralisingnation.
TheevolutionoffiscalarrangementsacrossthetiersofgovernmentissetoutinTable1.2,
which highlights the relatively small percentage of taxation raised by state and local
government known as fiscal imbalance (Warren 2004:39). The fiscal imbalance from the