2 May 2010 – UPDATED 3 May 2010  – The Henry Tax Review has been released today and with it some lengthy responses to the huge number of property items it considered.  Among these items – and of significant concern is the review’s apparent acceptance of the arguments pushed by the  competition/deregulated zoning property lobby that wants to see planning and zoning  set aside in favour of short-term single-issue price considerations. (see our recent coverage on this in the search button under “zoning”).

Note this comment from the review: “Higher house prices are likely to result from restrictions on the supply of housing that result from zoning, lengthy approvals processes and building code and other standards imposed on building quality.”

Following is a selection of responses contained in media releases issued from Sunday.

The Greens

3 May 2010 – The Greens will move in the Senate for a sensible sovereign fund from the resource tax to invest in Australia’s people and environment, a Greens media release said on Monday 3 May 2010.

The Greens will examine a raft of sidelined recommendations from the Henry Review to pursue in the Senate, including increasing income support for students and the unemployed, removing the Fringe Benefit Tax concession which currently encourages company car use, and introducing road congestion taxes to fund public transport, the statement said.

Australian Greens Acting Leader, Senator Christine Milne said: “We need to move our tax system over to taxing bads and rewarding goods, taxing waste and pollution and investing in our people and our environment.

“That would be real reform and the Greens will pursue it in the Senate and in the community.”

“The sensible thing to do would be to invest the revenue in training and education for jobs of the future, in income support for students and the unemployed, in building the public transport and renewable energy infrastructure we need to wean ourselves off our fossil fuel addiction.

“We will be looking in particular for increases in income support for students and the unemployed in next week’s Budget.

“The government’s approach would lock in a 19th century focus on digging up and exporting as much coal as we possibly can. That is no plan for the 21st century.”

Ms Milne said The Greens already have legislation before the Senate to implement one of Ken Henry’s recommendations – removing the incentive to drive more through the Fringe Benefits Tax concession for company cars.

“We will be raising this very sensible policy again with the government, as well as pursuing other Henry recommendations for reducing our reliance on petrol in an age of climate change and peak oil.

“This review was an opportunity to re-design our cities for people rather than cars, investing funds from a congestion tax in fast, convenient and safe public transport.

“This would also have been a perfect opportunity to remove the billions of dollars of subsidies that go to fossil fuel companies every year through fuel tax credits.

“The huge trucks that operate in open cut mines pay virtually no tax on the fuel they use to dig up more polluting fuels, while ordinary Australians pay tax on the fuel they use to get to work, to get the groceries and to take the kids to school because there are few decent alternatives.”

The Property Council of Australia

2 May 2010 – Property Council chief executive Peter Verwer said The Henry Review’s 138 recommendations and the Australian Government’s new tax plan have been welcomed by the commercial property sector.

The Government’s response to the Henry Review offered many positives for the industry, however, the Government needed to clarify its plans to finalise a second wave of reform opportunities, particularly in relation to inefficient property taxes, Mr Verwer said.

Mr Verwer said: “The Government has ruled out any tinkering with the negative gearing and CGT regimes.

“The gradual increase in the superannuation rate to 12 percent, the reduction in company taxes, concessions to small business, and the establishment of an infrastructure fund are also big positives.

“The Government has also committed to further waves of reform. At the top of its list should be the modernisation of Australia’s outmoded property tax system.

“Dr Henry’s report clearly demonstrates the critical importance of replacing inefficient property taxes with a modernised approach to real estate taxation.”

“In response, the Government has ruled out applying any new land tax on residences. This means industry can focus its efforts to reforming property taxes for income-producing real estate.

“The Henry Review also recommended a major update and re-write of trust rules to reduce complexity and uncertainty. We look forward to the Federal Budget, where we anticipate the Government will signal measures to deliver a simple, elective, managed investment trust regime.”

The Urban Task Force.

2 May 2010 – The Henry Tax Review, released today, has backed developer concerns on planning rules and development levies.
Taskforce chief executive Aaron Gadiel said the review considered key issues that were dampening urban development and crippling Australia’s housing supply.

Planning rules
Mr Gadiel said the Henry Report makes it clear that the current supply of housing is insufficient, placing upward pressure on home prices.

The report finds that higher home prices are the likely consequence of “restrictions on the supply of housing that result from zoning, lengthy approvals processes and building code and other standards imposed on building quality”.

“We welcome the report’s call for a serious community dialogue on these issues,” Mr Gadiel said.

“The dialogue can’t wait any longer and all levels of government must now focus on this issue.”

Infrastructure charges
Mr Gadiel said the Henry report had vindicated developers by finding problems in the way that infrastructure charges were being imposed on new development.

“The report said levies that were complex, non-transparent or set too high, discourage investment in housing, lower the overall supply of housing and raise its price.

“The report criticised planning rules that make development approval contingent on development charges of uncertain size, finding that the increased risk can affect project viability.

“This is the highest level recognition we’ve had that developer charges set in an ad hoc fashion or are subject to unexpected changes  are undermining investment in new urban development.”

Betterment taxes
Mr Gadiel said the report exposed the fact that many so-called “infrastructure charges” were in fact merely thinly disguised betterment taxes.

“We welcome the report’s clear statement that infrastructure charges should not be about taxing the profit of development.

“This will undermine many so-called infrastructure levies imposed wlily-nilly by local councils.”

Stamp duties
Mr Gadiel said the admission that existing State stamp duties on property conveyancing are highly inefficient and that they distort both residential and business use of property was inevitable.

“The next step is for state and federal government to actually do something about it,” he said.

“They can start by limiting stamp duty to land value only when off-the-plan sales contracts are entered into.

“This has worked in Victoria and would help reduce distortions across the rest of the country too.”

Land Tax
Mr Gadiel said that state governments should “take a hard look at themselves on the issue of land tax”, following the findings of the Henry review.

The report finds that levying higher land taxes on larger holdings discourages investment in land by institutional investors in rental housing.

The report also finds that land tax rates should be based on the value of a given property, so that the tax does not discriminate between different owners or uses of land.

“Developers holding land for re-development are bearing high land taxes, which are exacerbated by delays caused by the planning system”

Negative gearing
Mr Gadiel said the Federal Government was right to rule out today the Henry report’s proposals to reduce the value of negative gearing in securing investment in new rental properties.

“Investment returns in the Australian residential housing market are likely driven by capital gains rather than by rental yield.

“Reducing net rental losses and capital gains tax concessions would have reduced residential
property investment,” Mr Gadiel said.

“Even the Henry review admits that changing the taxation of investment properties could have had an adverse impact in the short to medium term on the housing market.”

Infrastructure fund
Mr Gadiel welcomed today’s announcement by the Federal Government that there would be a new infrastructure fund to help the states to invest in “nation building infrastructure necessary to support improved living standards”.

“However, we’re concerned that, from day one, this fund is to be biased to resource-based infrastructure required by the mining industry,” Mr Gadiel said.

“There is a desperate need for a permanent annual funding allocation by the Federal Government for large scale urban infrastructure projects, such as public transport and motorways.

“It seems that this fund will not be focused on these vital needs.”

The total amount of the infrastructure fund will start at $700 million in 2012?13 and will grow over time.

Mr Gadiel supplied these highlights from the Henry Tax Review

Planning rules
“For purchasers, affordability is constrained by prices that are high relative to average income levels. While high prices can result from increases in housing demand, they can only be sustained when supply is not responsive.

“Evidence suggests that the current supply of housing is at
insufficient levels, placing ongoing pressure on house prices.

“Higher house prices are likely to result from restrictions on the supply of housing that result from zoning, lengthy approvals processes and building code and other standards imposed on building quality.

“Housing affordability needs to be considered against the other policy objectives that motivate these regulations.”

“Evidence suggests that the current supply of housing is insufficient, placing ongoing pressure on house prices.”

“This suggests a serious community dialogue is needed on the distribution and quality of housing across Australia.”

Infrastructure charges
“Recommendation 70: COAG [Council of Australian Governments] should review infrastructure charges (sometimes called developer charges) to ensure they appropriately price infrastructure provided in housing developments.

“In particular, the review should establish practical means to ensure that these charges are set appropriately to reflect the avoidable costs of development, necessary steps to improve the transparency of charging and any consequential reductions in regulations.

Betterment taxes
“In general, infrastructure charges will operate more effectively if they are set to reflect the cost of infrastructure, not to tax the profit of development.

“Applying infrastructure charges through use of simple flat prices that do not well approximate actual avoidable costs can sometimes reduce housing supply. Where the charge exceeds the cost of providing infrastructure, it acts like a tax and can discourage development.

“This is more likely to occur where the size of the charge is not set relative to the cost of infrastructure but the developer’s capacity to pay. In these cases, the charges may attempt to capture part of the increase in value resulting from the provision of infrastructure or from changes in zoning, that is, to impose a betterment tax ….

“However, the benefit to the developer is difficult to determine, and attempting to set charges on this basis can lead to negotiations that are protracted and non-
transparent.

“… betterment taxes can increase the uncertainty associated with land development. To operate effectively, betterment taxes need to isolate the increase in value attributable to the zoning decision or the building of infrastructure from general land price increases at the local level.

“This is often difficult since the value of land will move in anticipation of a change in re-zoning. Sometimes this can occur many years before the re-zoning.

“Betterment taxes may be applied on an ad hoc basis and the rate of the betterment tax is sometimes left to discussions between developers and government as part of the planning approval processes, rather than being set in a transparent manner. Betterment taxation can
involve lengthy disputes as, by setting the tax conditions, the dispute is really about how to share the economic rent.

“Additionally, having a betterment tax in place may encourage governments to create economic rent through additional zoning restrictions or delays in land release, in order to raise more revenue. Where zoning is used in such a manner, it is likely to stop land being devoted to its most productive use — at least in the short run.

“A land tax applied to all types of land … is likely
to encourage governments to allow land to be used for its most productive use as this will increase the value of the land (and hence increase the revenue raised from land tax).

Stamp duties
“Existing State stamp duties on property conveyancing are highly inefficient, distorting both residential and business use of property.”

“Stamp duty encourages people to stay in houses when they would prefer to move, contributing to longer commuting times, larger average home sizes and lower labour mobility.”

“Stamp duties on conveyances are inconsistent with the needs of a modern tax system. While a significant source of State tax revenue, they are volatile and highly inefficient and should be replaced with a more efficient means of raising revenue.”

“Conveyance stamp duty is highly inefficient and inequitable. It discourages transactions of commercial and residential property and, through this, its allocation to its most valuable use.

“Conveyance stamp duty can also discourage people from changing their place of residence as their personal circumstances change or discourage people from making lifestyle changes that involve a change in residence. It is also inequitable, as people who need to move more frequently bear more tax, irrespective of their income or wealth.

tperinotto@thefifthestate.com.au

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