When it comes to Australian property, you sometimes get one tax and not the other; GST or stamp duty. So, I thought, “why not have a dialog about these two heavy hitting property investing costs.”
First, I’d like to label GST (stands for Goods and Services Tax) as the secret, hidden, or mysterious cost. It only rears its head on occasion. Most times we don’t even know it’s there.
It’s a federal government tax.
Like a nocturnal animal, GST only comes out at night; it doesn’t like the light. It’s hardly ever seen. It’s buried. Normally, it’s included in the price. And, it likes to stay there. That way it can attack and get it’s feed without hardly anyone noticing.
Stamp duty on the other hand is out there for everyone to see. Unlike the GST, it’s not buried in the price. It gets slapped on the top of almost every property deal. It’s like a trowel full of wet concrete piled on top of a freshly laid brick – you can’t miss it! It sits there all sloppy and messy.
But, the analogy ends there. The concrete serves a useful and lifelong purpose. I’m not sure I understand the useful and lifelong purpose of stamp duty.
Stamp duty is a state tax.
So, let’s start our discussion with the “sloppy and messy” – out there for everyone to see – Mr Stamp Duty.
Why Do People Complain About Stamp Duty?
I often hear people complain about stamp duty. And, I generally agree with them; stamp duty comes across to me as an onerous cost. The government simply collects a tax every time someone sells an existing property. And it’s a hefty tax at that; in the Northern Territory it’s about 4.5% of the purchase price. So, for every $100,000, the state government slides about $4,500 into its pocket.
Why is it onerous? Well, what’s the justification for this tax? Don’t people pay enough tax as homeowners? And, stamp duty can play a disheartening role in qualifying to buy. It can be the last hurdle in the property “steeplechase run” and some people can’t get over it. The deal dies because the buyer can’t raise the stamp duty. I would imagine this tax puts the brakes on a lot of property deals. I’m not sure I understand why stamp duty is a good thing … unless of course, you’re the government – then it’s a great thing.
How Come Nobody Complains about the GST?
When it comes to property, hardly anyone complains about the GST.
The GST is a big player in property. It rears its ugly head when you build a new home. The government waives this tax for the purchase of an existing property. But, for a new build, the ATO (Australian Tax Office) collects. And, they collect big-time.
I have to chuckle when the salesperson tells me, “If you build, there’s no stamp duty on the house. You only pay stamp duty on the land.” What’s not said is this … the purchase of the land doesn’t attract GST; the purchase of your new home does!
And, you should be extremely pleased the land only attracts stamp duty; it’s much less! Remember, stamp duty comes in at only about 4.5%; what does GST come in at? That’s right – currently – it’s 10%! Which would you rather pay; 4.5% or 10%?
Personally, if given a choice, I’d rather pay stamp duty on the new home. Let’s look at some numbers to see why. We’ll use Alice Springs land and build prices which may appear high to folks from other areas. But, the going price of a residential block of land in Alice Springs is about $250,000 … and that would be a bargain! And, the build costs here are about $1,800 or more per square meter! So, I’ll use land at $250,000 and build at $250,000. You won’t get much house in Alice Springs for a $250,000 construction cost!
1st Scenario: GST on construction; stamp duty on land (current tax situation)
Land: $250,000 + $11,125 (stamp duty at 4.5%); TOTAL = $261,125
New Home: $250,000 + $25,000 (GST at 10%); TOTAL = $275,000!
GRAND TOTAL: $536,125
So, here’s a question for the ATO, “Why not let people build their homes GST free and just let the state government charge stamp duty at the end?” If so, the savings on the home would be substantial. Let’s look at the numbers.
2nd Scenario: Stamp duty on construction and land. (thought experiment!)
Land: $250,000 + $11,250 (stamp duty at 4.5%); TOTAL = $261,125
New Home: $250,000 + $11,250 (stamp duty at 4.5%); TOTAL $261,125
GRAND TOTAL: $522,500
That’s a savings of almost $14,000! Not bad.
Course the federal government may look at it differently. To them, it represents a $25,000 tax revenue loss. But, the state government gains an additional $11,125 and the new home buyer saves almost $14,000. So, two out of the three parties are happy.
But, think of what an extra $14,000 in the pocket of consumers would do for the economy. Now contrast that with an extra $25,000 in the ATO’s pocket. Who do you think would spend it more wisely? More efficiently? More economically?
Abolish Stamp Duty? Abolish GST on New Homes? Why not?
Now here’s something to stretch the mind … what if the state government were to abolish stamp duty? And, what if the federal government did away with GST on new home construction? Can you imagine such a thing?
If we run the numbers again with GST and stamp duty abolished, we find a much more exciting scenario.
In our example above, if both stamp duty and GST were eliminated for new home construction, consumers would be looking at saving over $36,000! What would you do with an extra $36,000?
What this means is your new home would cost $500,000; $250,000 for the land and $250,000 for the build. That’s it. No tax. What a concept.
This “tax free” idea seems to really take hold when you consider owner occupiers. After all, isn’t a personal residence considered a necessity? Kind of like food. Basic food doesn’t attract GST or stamp duty. Why not include “basic” owner occupied housing as part of this tax free zone? Just an idea.
Does GST play a role in the new home construction buisiness? Absolutely. And, it’s a big role. Much bigger and more onerous (in my opinon) than the dreaded stamp duty monster.
Next time … ask your Salesperson …
So the next time a salesperson starts bragging to you about “no stamp duty” on a new home build, ask a simple question, “And, how does my savings on stamp duty compare to the GST I’ll be paying?” Then, just wait patiently for the reply.
When the salesperson stops for a breath, follow-up with this question, “If given a choice, which would you rather pay, GST or stamp duty on the new home build?” Then wait and listen.
Finally, finish up by asking, “So, tell me again why paying GST on the new home build is better than paying stamp duty?”
And, the salesperson knows the answer. We all know the answer. It’s not pretty. But, the salesman won’t let you down. Tell it like it is …
“Just be glad the government doesn’t charge you both!”
And, you know what? The salesperson is right.
Now, over to you; Which do you like better, GST or stamp duty?
Article posted on 18 Feb 2011.
Photo: Tax Attorney on flickr.