Land tax reform: reforming the rates

One of the remarkable things about the rental market in New South Wales (and the rest of Australia) is its domination by small landlords. More than three-quarters of landlords own just one property each, and large institutions are almost completely absent from the market. Affordable housing campaigners have dreamed about getting institutional investors – in particular, super funds – involved in rental housing, figuring they'd be better for affordability and security (because they'd be more interested in a steady flow of rents than in chasing speculative gains on premium properties).

One of the things standing in the way of institutional landlords is the current structure of land tax rates.

Land tax is currently levied at progressive marginal rates on the total value of land owned by the owner. These rates are zero for the first $432 000 worth of land owned; then 1.6 per cent of the value above that threshold up to the 'premium threshold' of $2 641 000; then 2 per cent of the value above the premium threshold.

And because those rates are applied to the total value of assessable land owned by the owner, large-scale land owners end up paying a higher rate of land tax than small land owners.

For example, the owner of land valued at $500 000 will pay $1 188 in land tax – in other words, 0.24 per cent of the value. Meanwhile, the owner of land valued at $5 million would pay $82 624, or 1.65 per cent of the value – in land tax.

That's strong preferential treatment for the small landlord.

A better way of doing land tax would be to have progressive marginal rates linked to each lot of land's value per square metre. This would end the preferential treatment of small landlords, without letting high-value property owners off the hook.

Reforming the rates, as well as broadening the base, would make land tax an even more effective measure for improving housing affordability.