The Treasurer, Tim Pallas, justified the new measure on the basis that it would “discourage land banking within metropolitan Melbourne and thereby promote the efficient use of urban land”. It is possible that there are some developers sitting on large backyards or tennis courts intending to develop them at a later time, but the vast majority of people in metropolitan areas whose homes include more than one title are not land bankers.
The loss of the exemption might also be justified on the basis that it will hit those who can afford it – people who have built a tennis court or a swimming pool on the extra certificate of title. But in many, if not most cases, those affected will be homeowners who have acquired a laneway from their local council to extend their backyard. They may even be unaware that their house is sitting on two titles. If the policy were really aimed at taxing the better off there would be far more targeted ways of achieving that objective, such as placing a valuation cap on the family home exemption.
One of the most ridiculous aspects of this new tax is that it is easy to avoid. As the Treasurer himself pointed out when introducing the amendment into Parliament, “Owners in metropolitan areas have the option of consolidating [merging] titles with their principal place of residence land so that an exemption can continue to apply to the consolidated land.” How often does a Treasurer, when introducing a new tax, invite people to avoid it?
I would expect that wealthier property owners will take up the Treasurer’s invitation. You won’t see many property owners in Portsea or Toorak paying land tax on their tennis courts – it will be worth their while to consolidate their certificates of title. But for ordinary mums and dads in less upmarket suburbs, consolidating titles may be unattractive because it will require them to spend money on having a survey done, and meeting titles office fees and paying legal costs. The cost of doing this might be greater than the land tax bill.
And even for those who do consolidate their titles the cost of doing so will effectively be money thrown away that could have been spent more productively.
The new measures are expected to raise $43 million, which is a small change compared to the total land tax revenue base and compares unfavourably to the money that might be outlaid in avoiding the tax.
At the beginning of this article I compared the 17th century windows tax to the new amendments to the Land Tax Act. History explains that the windows tax made sense at the time because the number of windows in a person’s house was a good guide to how wealthy they were. The number of certificates of title a person’s house sits on is not necessarily any guide at all to how valuable the property is or how wealthy its owners may be. The new land tax therefore compares unfavourably even with the 17th century windows tax.
The government should rethink this change to the law and restore the full exemption to metropolitan house owners.
Michael Flynn, QC, is a barrister specialising in tax and past president of the Tax Institute.