Inquiry into Victorian Government Taxation and Debt · 1.2: Change land tax assessment periods and land valuations in line with the financial year to ease the compliance burdens of

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Property Council of Australia

Inquiry into Victorian Government Taxation and Debt

A Submission to the Economic Development and Infrastructure Committee of the Victorian Parliament

30 September 2009

Property Council of Australia: Submission on Victorian Government Taxation and Debt Page 2 of 35

Table of Contents

Executive Summary....................................................................................3

Recommendations......................................................................................4

1. Land Tax ................................................................................................7

2. Stamp Duty.............................................................................................10

3. Payroll Tax..............................................................................................13

4. Harmonisation: State/National Reform....................................................16

5. CBD Car Parking Levy............................................................................21

6. Rates and Valuations..............................................................................23

7. Fire Services Levy ..................................................................................24

8. Retail ......................................................................................................25

9. Developer Levies and Charges...............................................................26

10. Infrastructure and Debt ........................................................................29

11. Sustainability and Climate Change .......................................................32

References………………………………………………………………………...35

Contact .......................................................................................................35


Executive Summary

The Property Council is the largest and most influential industry organisation within its sector and has in excess of 2000 member companies throughout Australia representing property assets of over $300 billion. Approximately 500 of these members are part of the Victorian Division. Members of the Property Council represent the entire property investment cycle: finance, design, development, maintenance of property and the services that underpin the industry.

The Property Council believes that state property taxes such as land tax and stamp duty are a disincentive to investment. Land tax and stamp duty eat away at the retirement savings of ordinary Australians. Ten million Australians own commercial property through their superannuation, property trusts or life insurance policies. Reforming these inefficient taxes would drive economic development and give a financial boost to virtually every household.

The Property Council is committed to exploring the best means of increasing the economic welfare of Victorians, while providing the Victorian Government with a predictable and growing revenue base within the context of a world-class tax framework. While the Property Council acknowledges the Victorian Government’s recent tax reform program, reform must be carried out to maintain a truly competitive State.

In the Victorian Government’s submission to the Henry Review it has been emphasised that, despite facing the worst global economic conditions in generations, efforts at major, long term reform are essential for a strong recovery and a prosperous future.1 The Property Council agrees with this sentiment and believes that Victoria is in a strong position to instigate reform.

On that basis, the Property Council recommends that the Victorian Government should initiate a range of measures within the State aimed at long term structural reform. The 2009 Victorian State Government budget saw an increase in debt funding of infrastructure, a position the Property Council has advocated over a period of time. We believe the Victorian Government should continue to use debt to invest in major infrastructure projects. At the national level, the Victorian Government should provide leadership in working with other Australian Governments in reforming Australia’s taxation system. The central task for all Australian Governments is to pursue best practice harmonisation models across all States. The cumulative effect of these measures will be to stimulate economic activity and enhance the competitiveness of the Victorian and Australian economies internationally.

Jennifer Cunich Executive Director

1 Victorian Government, A Tax System that Works for Australia: Victorian Government Submission to Australia’s

Future Tax System Review, 2009.


Recommendations

Land Tax

1.1: Commit to moving towards flatter land tax rates by further reducing the top marginal rate to 1.5%.

1.2: Change land tax assessment periods and land valuations in line with the financial year to ease the compliance burdens of property owners.

Stamp Duty

2.1: Cut the top rate of stamp duty on commercial property transactions to 4.5 per cent.

2.2: The next step is to move to the abolition of stamp duty on commercial property transactions in line with broadening the tax base.

2.3: To ensure that the Australian real estate investment trust (REIT) market remains a world leader and competitive, stamp duty rules must be rationalised to remove red tape, eliminate double taxation and promote the efficient movement of capital whilst ensuring that the current tax base is protected.

2.4: Amend the Duties Act to extend the corporate reconstruction relief to both listed and unlisted trusts in line with the Federal Government Capital Gains Tax relief.

2.5: The Victorian Government must immediately address instances of stamp duty being applied on top of other taxes, levies and charges.

Payroll Tax

3.1: Accelerate the breadth and depth of payroll tax harmonisation between all States with consideration of the NSW – Victorian agreement.

Harmonisation: State/National Tax Reform

4.1: The Victorian Government should advocate to other Australian Governments to adopt the Business Coalition for Tax Reform (BCTR) State Tax Reform Model for comprehensive business tax reform.

4.2: Australian Governments should commit to a new round of business tax reform in consultation with industry, underpinned by a new inter-governmental agreement (IGA).

4.3: The Council of Australian Governments (COAG) should:

(a) set a timetable to eliminate inefficient business and property taxes with clear performance milestones;

(b) commit to a root and branch modernisation of the business tax system;

(c) commit to a new system for allocating the GST revenue between jurisdictions;

(d) set a five year target to reduce Australian Government reliance on indirect taxes;

(e) commit all States and Territories to undertake five yearly reviews of the indirect tax systems with the objective of reducing their reliance on high dead weight taxes and reducing compliance costs.


4.4: Australian Governments should ratify a new IGA to give effect to COAG’s tax reform program.

CBD Car Parking Levy

5.1: The Victorian Government should abolish the CBD Car Parking tax.

Rates and Valuations

6.1: The Victorian Government should seek from Councils a financially responsible program. The rate burden should be distributed away from the property classes that are over-taxed. Furthermore, measures should be introduced to ensure that rate increases are no greater than CPI.

6.2: The Victorian Government should take a more proactive and financially responsible role in monitoring increases in council rates.

6.3: The City of Melbourne’s differential rating scheme should be revised.

Fire Services Levy

7.1: The Victorian Government should conduct another review of the fee structure and protocol of false callouts in 2009. The Property Council believes the findings of this review should be in line with other jurisdictions where industry should be granted one false alarm callout per 60 days without charge.

Retail

8.1: The Victorian Government should amend the following areas of the Retail Leases Act 2003: no costs at VCAT; management fees and land tax.

Developer Levies and Charges

9.1: The Victorian Government must work with key stakeholders to address issues with the implementation and delivery of infrastructure in growth areas.

9.2: The Growth Area Infrastructure Contribution (GAIC) is to be levied after the completion of the Precinct Structure Plan, when the developable area of the property is known, and is paid on the first transaction on transfer of land. In the case of land which is not sold, prior to its subdivision or development, the land owner will pay the GAIC progressively at the end as part of the development process.

9.3: The Victorian Government should use alternatives to developer levies to finance future infrastructure. (Refer to section 10)

9.4: Developer levies should be used as a last resort and abolished completely in the medium term.

9.5: These charges should be reviewed and greater consultation to take place with the development industry before any final decision on local charges is made.


Infrastructure and Debt

10.1: The Victorian Government should increase its debt capacity to deliver major infrastructure projects.

10.2: The Victorian Government should maximise government borrowing, PPPs and tax increment funding (TIF) to fund future infrastructure, in preference to inefficient developer levies.

10.3: The Victorian Government should commit to a major investment in infrastructure as a public good to address existing infrastructure deficits, cater for new population growth and drive future economic growth.

Sustainability and Climate Change

11.1: Provide assistance and incentives for building retrofits including grants, subsidies, accelerated project approvals and rebates for improvements undertaken by households and the commercial sector.

11.2: The Victorian Government should advocate for the provision of accelerated sustainable building depreciation through the Australian tax code providing for building investments that involve specific energy efficient fittings, fixtures and fabric or raise the overall energy performance of the building to a specific standard.

11.3: Change the feed in tariff policy from a net to a gross feed in tariff model to provide greater financial incentive for the take up renewable energy sources.

11.4: The Victorian Government should advocate for a fair distribution of Carbon Pollution Reduction Scheme (CPRS) funds for Victoria similar to that of the GST.

11.5: Expand the Victorian Energy Efficiency Target (VEET) scheme to the commercial building sector through the remittance of state duties to drive energy efficiency gains and benefits for the Victorian industry.


1. Land Tax

The high cost of land tax in Victoria continues to be a serious disincentive to property investment compared with other asset classes. It is unduly progressive and biased against holders of large holdings in a single vehicle. There is no equity in the progressive rate structure. The many individuals who have small investments through listed companies, superannuation and public trust investments together pay land tax at a rate based on the aggregated holdings of the investment institution. The effective rate for those small investors is far in excess of that which would apply to an equivalent direct investment.

Land tax has become a major impost to small to medium business as inner city and coastal property values have rapidly increased in recent years. This penalises businesses that have a large land component. The benefit of capital gain is not necessarily realised because the owner may have no desire to relocate, or may not be able to find a suitable alternate site.

Other impacts of land tax include housing affordability. The housing development sector often holds large parcels of land for future subdivision and development. This land is usually taxed at the highest marginal rate. The cost of holding the land is passed on to the consumer in the form of higher house prices. This impacts on overall affordability of housing, particularly for the first home owner.

While the Property Council acknowledges the reforms to land tax over the past six years, we believe the Victorian Government is still too dependent on land tax as a source of revenue.

The growth in land tax collections over recent years is indicated in the graph below:

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$million

1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Victorian Land Tax Revenue 1999-20092007-08 is the revised figure, 2008-09 is the budgeted figure

While there is no doubt the changes to the rate in the dollar have been significant, land tax revenue continues to rise, and is expected to exceed $1 billion for the first time in 2008-09.


The maximum land tax rate in Victoria is higher than the comparable rates of its two largest regional competitors, New South Wales and Queensland. These high rates are also problematic because aggregation provisions result in owners with multiple properties paying the maximum rate on all properties, rather than on a site by site basis.

For example, a property with a site value of $2 million owned on a single holding basis would incur a land tax bill of $12,000. If this property is one of three properties in a portfolio valued at $2 million, the property is effectively taxed at $30,000. The table below illustrates the point:

Victorian Land Tax Liability per Property

Site Value Number of Properties Land tax bill total Land tax bill per property

$2 million 1 $11,975 $11,975

$2 million 3 $92,475 $30,825

While other jurisdictions also have aggregation provisions, their rates in the dollar are much lower. The solution to the aggregation problem in Victoria is to continue to flatten the rate structure, and bring the top marginal rate to 1.5 per cent. This reduction should be considered in priority to reductions in other rates and increases in the tax free threshold.

Flaws in the System

The land tax system lacks basic equity because it is levied at widely varying rates according to the form of investment. The current system does not impose the highest rates on the wealthiest investors. In fact, the reverse is true because small investors use public investment vehicles which are subject to the highest land tax rates.

Some of the key complexities with the Victorian land tax system are:

Land tax is assessed on a calendar year basis. This leads to confusion among businesses, which operate in line with their own financial years. In addition, the assessment of land tax on a calendar year basis distorts the Victorian Government’s budget planning, which is performed in line with their financial year.

Land tax is complex, costly to administer and deserves the continued attention of the Victorian Government because:

• it reduces the investment returns of Victorian property through costly assessment procedures;

• the current regime hands other States and countries a competitive edge over Victoria;

• the absence of a low broad rate breaches the criteria for an efficient, simple tax;

• it erodes the Government’s revenue base through a variety of administrative procedures;

• land tax is inflationary and adds to the cost of doing business in Victoria – a double blow to the Victoria’s competitiveness;

• land tax liabilities filter though to businesses in an inequitable fashion;

• land tax is inequitable in the sense that only a small proportion of companies pay it. The inequity is then magnified given the lack of a nexus between the owners’ tax liability and the ultimate incidence on property users; and


• aggregation involves complex administration due to the requirements to assess each land owner rather than each parcel of land.

Land tax revenue depends on the economic performance of a highly cyclical industry. It is far from the ideal of providing the state with a predictable growing revenue base.

Program for Reform

The current structure of six brackets is complex and inequitable. The Property Council seeks a simpler, fairer system with less rate brackets. Further, the top rate of 2.25 per cent must be reduced to ensure competitiveness with other states. The medium term goal for Victoria should be a flat rate of land tax, the same as or below the top rate of its competitors, at which time the impact of aggregation would become irrelevant and the need for costly administration would be eliminated.

In 2007 the Property Council, with the cooperation of the Victorian Government, commissioned Access Economics to research the potential for further property tax reform.2 The Access Economics research assessed:

• the Victorian economy and budgetary position, relative to New South Wales, Queensland and Western Australia;

• the affordability of further land tax reform;

• the affordability for stamp duty on commercial conveyances; and

• the economic impact of the above reforms.

The key finding from the research is that there is considerable scope for major reform in land tax and commercial stamp duty. Access Economics’ research concludes that, “the Victorian economy has a strong budget position and prospect. As a result, there is considerable scope for reform.” Modelling by Access Economics demonstrated that a raft of cuts to land tax is affordable and delivers benefits to the state. The Property Council advocates for the top marginal rate of land tax to be reduced to 1.5 per cent. This would bring the top rate below that of New South Wales, creating a competitive business attraction environment. It also lessens the impact of aggregation. The cost of reforming land tax to a top rate of 1.5 per cent is estimated to be $178 million per annum based on 2007 figures.

This program moves Victoria towards a competitive land tax system. It is staged to allow for revenue changes. It is expected that revenues from land tax will continue to increase as the next wave of valuations take effect, and we suggest this will increase the pressure on the Victorian Government to take action. The suggested reform will dramatically change the way Victoria is viewed as an investment location: a simplified State tax system will produce multiplier effects across the community. Previous land tax reform has improved the perception of Victoria as an investment destination. Further reform would make Victoria the investment destination of choice.

Recommendation 1.1: Commit to moving towards flatter land tax rates by further reducing the top marginal rate to 1.5%.

Recommendation 1.2: Change land tax assessment periods and land valuations in line with the financial year to ease the compliance burdens of property owners.

2 Access Economics, Reforming Land Tax and Stamp Duty on Commercial Property in Victoria, 2008.


2. Stamp Duty

The Property Council’s overarching position on stamp duty on commercial property transfers is that it should be abolished, as agreed in the original intergovernmental agreement (IGA). The Property Council recognises that State Governments across Australia have moved away from this position. Nevertheless, it is an inefficient tax which impedes the flow of capital into Victoria. Combined with GST revenue flows to Victoria, the case for a reform program to phase out stamp duty is strong.

Stamp duty is also a significant factor in investment decision making. The Property Council, through its membership, is aware of the barrier and disincentive that stamp duty rates pose to potential investors in property in Victoria, especially real estate investment trusts (REITs). While Victoria’s top stamp duty rate is no higher than several other States, it is higher than Queensland, one of our main regional competitors. Furthermore, the progressiveness of the rate scale results in Victoria being the highest taxing state across virtually all property values.

Purchase amount Vic $ Tax NSW $ Tax QLD $ Tax

$500,000 $25,070 $17,990 $15,925

$1,000,000 $55,000 $40,490 $38,175

$2,500,000 $137,500 $122,990 $116,925

$5,000,000 $275,000 $260,290 $248,175

$10,000,000 $550,000 $535,490 $510,675

Highest Rate 5.50% 5.50% 5.25%

Stamp Duty on Commercial Property Transfers

Work undertaken in 2007 by Access Economics also assessed the capacity for the Victorian Government to reform stamp duty on commercial property transfers. Access Economics has demonstrated that the Victorian economy is in a strong position to reform stamp duty on commercial property. The Property Council’s immediate priority for stamp duty on commercial property reform is to reduce the rate to 4.5 per cent as a down payment for long term reform.

A commercial stamp duty rate of 4.5 per cent would be more competitive than New South Wales and Queensland rates. This would give the Victorian investment environment an edge over its interstate competitors. Based on 2007 figures, the cost of the reform is estimated to be $122 million per annum. As discussed earlier, the year on year windfall from property tax revenue demonstrates a case for returning the windfall to the property sector in the form of reform.

Our recommendations are not aimed at reducing tax for the sake of reducing tax. The reforms suggested are designed to build on the Commonwealth/State reforms. They are aimed at attracting and retaining increasingly mobile capital in order to promote business activity and the jobs that go with it. One of the Victorian Division’s key objectives is to help create a more competitive business environment in Victoria that attracts the capital and talent that fuels business activity. These goals can be best achieved by abolishing or


reducing those taxes where the removal or reduction of a tax will deliver the greatest economic benefit to the community.

Recommendation 2.1: Cut the top rate of stamp duty on commercial property transactions to 4.5 per cent.

Recommendation 2.2: The next step is to move to the abolition of stamp duty on commercial property transactions in line with broadening the tax base.

(Refer to Section 4: scenarios of National/State cooperation for business tax reform).

Potential for National Harmonisation

Australia currently has a world leading REIT industry, and has one of the highest percentages of securitised ownership of real estate in the world. However, the REIT market in Australia suffers under a number of regulatory inefficiencies at the state and federal levels. At a state level, the most significant regulatory inefficiencies arise from a lack of uniformity and harmonisation of stamp duty rules around Australia.

There are eight fundamentally different taxing regimes which apply to investments by property owners including public and wholesale REITs. Property owners, who operate nationally and/or globally, are exposed to increased costs and complexity. These different regimes directly impact on the ability of the Australian REIT market to compete globally.

The Property Council has developed a model which would create national harmonisation of land rich duty provisions and corporate reconstruction relief. Without reforms to put in place similar State land rich and corporate reconstruction stamp duty rules:

• cross jurisdictional investment will be inhibited for the majority of property vehicles that can’t implement complex structures (foreign investors will seek easier investments);

• investment capital and potential returns will be lost in unnecessary ‘double’ taxes and costs;

• Australian property portfolios will be less attractive to investors; and

• Australia will miss the opportunity to capture a larger share of international capital.

There are significant opportunities for the States in adopting consistent land rich and corporate reconstruction stamp duty rules based on best practice:

• encourage cross jurisdictional investment and increase investment activity;

• remove duplication of transaction costs;

• simplified investment across States encouraging more transactions;

• reduce the need for complex investment structures;

• increase government revenue from increased number of underlying transactions; and

• increase our international competitiveness.


The Issues

There are a number of technical issues which arise in relation to the stamp duty laws which build inefficiencies and red tape into the REIT market:

• there is no common classification of what is a public or wholesale unit trust throughout Australia;

• often double taxation arises on the establishment of a new REIT and the investment by public/wholesale investors in that vehicle;

• many REIT vehicles incur significant administrative/legal/accounting costs on determining their status in each Australian jurisdiction for stamp duty purposes;

• corporate structures cannot be rearranged without incurring significant stamp duty; and

• there is a lack of uniformity and breadth in the availability of exemptions from duty on reorganisations of land holding groups, preventing efficiencies being gained from restructures which do not change the ultimate beneficial ownership of land.

The practical implications of these technical difficulties are that many REITs choose not to invest in particular Australian jurisdictions due to the onerous and restrictive stamp duty rules. Similarly, foreign investors are often deterred from investing in Australian real estate (either directly or through REITs) because of the complex regulatory and taxation regime, as well as the high tax cost of investing in Australian real estate.

The main changes to Victorian land rich duty would be:

• companies and unit trusts would be treated consistently; and

• a relevant acquisition to be where the significant interest is 50% or greater in the landholder.

Recommendation 2.3: To ensure that the Australian REIT market remains a world leader and competitive, stamp duty rules must be rationalised to remove red tape, eliminate double taxation and promote the efficient movement of capital whilst ensuring that the current tax base is protected.

Corporate Reconstruction Relief

As mentioned above, the Property Council has a national corporate reconstruction relief harmonisation model. In addition to this model, a recent amendment to the corporate reconstruction relief provisions requires further reform.

The Property Council supports the Government’s decision in 2008 to extend corporate reconstruction relief to certain real estate investment trusts in line with recent changes to Commonwealth Capital Gains Tax relief (CGT). The stamp duty relief will allow these trusts to operate more efficiently and competitively with international markets. This is commonly referred to as the “top hatting amendment”.

While the relief is welcome, it extends only to listed trusts. The Property Council believes this exemption should apply to listed and unlisted entities. The Federal CGT change does not make the distinction, nor does the Western Australian duties legislation.

The Property Council strongly advocates for consistency across jurisdictions in this matter. A broad exemption does not pose a revenue leakage issue, as the Federal provisions require ultimate ownership to remain identical.


Recommendation 2.4: Amend the Duties Act to extend the corporate reconstruction relief to both listed and unlisted trusts in line with the Federal Government Capital Gains Tax relief.

Stamp Duty – Tax on Tax Effect

Wherever possible the Victorian Government should avoid stamp duty and other levies being applied on top of other taxes, levies and charges. For example, the insurance premiums for commercial buildings incur the Terrorism Insurance Levy, the Fire Services Levy and GST before Victoria’s stamp duty is applied. This is an unreasonable and unbudgeted windfall and must be addressed, by levying stamp duty on the base building insurance premium rather than the total of all levies and charges.

Recommendation 2.5: The Victorian Government must immediately address instances of stamp duty being applied on top of other taxes, levies and charges.

Such tax on tax revenue windfalls further entrench the belief that stamp duty is applied in a manner designed to maximise revenue. Where stamp duty is paid it must apply to the base transaction and not to the GST inclusive amount, levies, charges or non base amounts.

3. Payroll Tax

Payroll Taxes and Jurisdictional Inconsistencies

The Australian Government transferred the then national payroll tax system to the States in 1971. Under the control of the Australian Government, payroll tax arrangements were uniform across all jurisdictions. Since then, the States have amended their payroll tax arrangements to cater to their respective needs and demands. As a consequence, State payroll tax arrangements differ in each jurisdiction with regard to:

● tax rates;

● thresholds;

● administration (such as monthly payment date);

● definition of wages (such as treatment of employee share schemes);

● contractor provisions;

● treatment of fringe benefits;

● exemptions for charities;

● exemptions for provision of motor vehicles and accommodation; and

● grouping provisions.

There are a number of additional problems with an increase in payroll taxes. Notably, payroll taxes still involve generally poorer performance than the benchmark tax. Reliance on payroll tax increases therefore still involves a tax base with some of the problems of the current mix. Additionally, possibly more than many other taxes, there is considerable tax competition between the States through payroll tax. The States adjust payroll taxes when seeking to attract investment and employment (as well as when responding strategically to incentives under the system of HFE and grants commission processes). One effect of this


competition is for smaller States to undercut the larger States whenever the larger States cut their tax rate.

Over time, the main effect of interstate competition has been to reduce the overall amount of revenue raised from payroll taxes. It is likely that interstate competition in payroll tax would become more intense if this source of tax revenue was increased in absolute terms and in terms of relative importance. It is likely that increased reliance on this tax base will be unstable and unsustainable. A State tax reform that is totally self-funded by the State governments will be difficult to implement. Some problems of this approach can be reduced if the States are able to act in a coordinated way, especially in terms of agreeing to eliminate tax competition in areas such as the payroll tax. This could add to the existing agreement between NSW and Victoria regarding harmonisation of payroll tax regimes.

Sharing the Good Tax Bases

While some taxes are better than others, the benchmarking results suggest that most of the State taxes are poor taxes. The benchmark tax performs better than all of the existing State taxes because it has a very broad base. It is notable that other Australian Government taxes share the characteristic of having a broad base as well. Reflecting this, other studies have found that income taxes are also better than most if not all of the State taxes.

To obtain the best outcomes from tax reform, the focus of change should be upon elimination of the inefficient ‘worse’ taxes and finding a way to close the gap created by the loss of state tax revenue. Logically, this would involve substitution of the worst taxes with revenue from the best tax bases, which are those of the Australian Government. The purpose in doing so from the Australian Government’s perspective would be that reducing state taxes would produce better outcomes for the community than cutting Australian Government taxes. It is difficult to be definitive about the extent of revenue base sharing that the Australian Government can afford. There are pressures upon the budget, including those arising from the crisis in global financial markets which need to be kept in mind.

However, the September final budget outcome for 2008-09 shows a modest fiscal improvement reflecting the effects of economic stimulus as well as some one-off factors. The Australian Government general government sector recorded an underlying cash deficit of $27.1 billion (2.3 per cent of GDP) for 2008-09. This outcome was $5.0 billion better than expected at the time of the 2009-10 Budget, reflecting lower than anticipated spending of $2.2 billion and higher cash receipts of $2.8 billion.

Importantly, total tax receipts were $3.3 billion above the estimate at the 2009-10 Budget, primarily due to stronger than expected company income tax receipts of $3.6 billion, partly offset by lower than expected personal income tax receipts of $0.5 billion.3

The Property Council welcomes this budget outcome. Australia’s cash deficit relative to GDP remains low, and significantly lower than other OECD economies. This opportunity should be harnessed to further reform inefficient state taxes, which will strengthen the structural position of the Australian and Victorian economies.

3 Australian Government, Final Budget Outcome 2008-09, http://www.budget.gov.au/2008-09/content/fbo/html/part_1.htm


Harmonisation of the Payroll Tax Regimes: Victoria and NSW.

From 1 July 2007, NSW and Victoria introduced harmonised payroll tax legislation and administrative arrangements designed to simplify and reduce red tape. Examples of amendments made to achieve harmonisation are:

● consistent contractor provisions;

● changes to fringe benefits and the gross-up rate;

● consistent charitable exemption provisions;

● consistent grouping provisions;

● consistent exemption rates for motor vehicles; and

● overnight accommodation allowances.

The aims of this payroll tax harmonisation project is to support business investment, improve competitiveness and increase productivity by simplifying administration and reducing red tape and compliance costs for businesses that operate in multiple States.

As of 1 July 2009, Tasmania, South Australia and the Northern Territory are all fully harmonised with the NSW-Victorian agreement on payroll tax. Queensland also harmonised key aspects of its payroll tax regime with the NSW-Victorian agreement from 1 July 2008.

While the Property Council of Australia acknowledges this important work, there are ongoing challenges in simplifying the administrative complexities between jurisdictions, and to establish greater clarity on interpretative legislative issues. For instance, will determinations within in one jurisdiction have precedent value in other jurisdictions?

Recommendation 3.1: Accelerate the breadth and depth of payroll tax harmonisation between all States with consideration of the NSW – Victorian agreement.


4. Harmonisation: State/National Tax Reform

Cooperative Federalism

Review of the strategic constraints to substantive State tax reform points to the salient role that cooperation in Federal arrangements needs to play. Essentially, there are three broad themes in co-operative arrangements: cooperation within the States — agreement between the States eliminating inefficient taxes and expanding more efficient State taxes; cooperation between the Australian Government and the States — where Australian Government taxes (such as GST or personal income tax) are used to replace State tax revenue, or introduction of a State personal income tax or State income tax premium; and combined cooperation — a mixture of the preceding two themes. To make the benefits of tax reform more tangible it is helpful to think about specific reform scenarios. Of course there are many State taxes and many possible combinations and permutations involving which taxes to change, which to increase and by how much.

To illustrate and communicate effectively some of the key attributes of tax reform it is necessary to be selective. Three basic tax mix scenarios have been prepared to illustrate the potential gains from tax reform. Each scenario shows the effects of a portfolio of investment in tax reform. The reform scenarios have been prepared in consultation with the Business Coalition for Tax Reform (BCTR) project steering group for this study. The Property Council is an active member of the BCTR.4

Given the focus of the study upon State business tax reform the scenarios deal with the removal or reduction in State business taxes. The State tax reform scenarios selected by the BCTR are intended to illustrate key discussions. They are designed to show that economic performance in terms of improved economic growth or enhanced international competitiveness can be delivered through reform. A further dimension that is important to illustrate is the effect of the scale of reform and how much tax reform we can afford to ‘purchase,’ given the revenue, debt, and expenditure neutrality constraints. Thus, the more funding we have, the more tax reform can be achieved. All three scenarios reflect funding involvement from the Australian Government. Reflecting general fiscal policy constraints, it is assumed that the Australian Government will only fund up to $10 billion. These funds are then transferred to the States through federal grants.

How were the scenarios selected?

The change scenarios modelled in this study were selected by the BCTR through a workshop. During this workshop, evidence about the effects of changes was presented to assist the BCTR in making choices about the reform scenarios. The analysis showed that the biggest gains from reform come from replacing inefficient State taxes with more efficient State or Federal taxes. This information assisted the BCTR in selecting the tax mix of the reform scenarios. Analysis of previous tax reform exercises and taxation reviews and of

4 The BCTR is a forum for bringing together the views of the business community on tax reform issues. BCTR

members share the common objectives of creating and implementing a better tax system that enhances both international and domestic business competitiveness and fairness and which assists in creating a business climate conducive to investment, growth, job creation and private saving. The BCTR maintains an active interest in the implementation of the New Tax System, tax reform measures and continues to promote understanding of the reasons for further reform and to provide input into the implementation process (http://www.bctr.org).


constraints to change was presented to assist the BCTR in identifying a strategic approach to reform. A more strategic approach pointed to the following elements of reform:

● little can be achieved with incremental adjustments in specific taxes on a

tax-by-tax basis;

● reform of significant scale is needed;

● reflecting many binding constraints, State tax reform has to be revenue,

expenditure and debt neutral; and

● Federal-State cooperation is essential.

The Australian Government has access to the better tax bases to replace poor state taxes. State cooperation is also required to improve the contribution that can be made from the State taxes that are efficient and to maintain and preserve efficient revenue sources. Based on the above, the BCTR selected three change scenarios that were directed at shaping key outcomes (raising growth, raising competitiveness and maximising State tax reform). They are revenue, expenditure and debt neutral, incorporated cooperation between the Australian and State governments, involved a reasonably large scale reform (change of roughly $10 to $20 billion) and recognised the fiscal constraints of the current economic conditions.

Change Scenario 1: Raising Growth.

The main thrust of this scenario is to obtain a boost to economic activity by removing or reducing State taxes that are suppressing it. This is achieved by reducing State taxes that were found to have the higher index scores against benchmark 1 (taxes and growth) until the funds available for reform are exhausted. In this scenario the source of funds is funding from the Australian Government with the constraint discussed above. With only $10 billion funding from the Australian Government, this scenario can afford to reform a few State taxes. Specifically, the scenario of change includes:

● removal of stamp duty on insurance; and

● reduction in stamp duty on both residential and non-residential properties. This can be achieved by reducing the rate of those duties.

Payroll tax, land tax and stamp duties on motor vehicles remain unaltered.

Change Scenario 2: Enhancing International Competitiveness.

The target of this scenario is to enhance competitiveness, attracting more investment by removing State taxes that were found to have the higher index scores against benchmark 2 (taxes and competitiveness). These taxes are reduced or removed until the funds available for reform are exhausted. In this scenario the source of funds is funding from the Australian Government with the constraints discussed above. Specifically, change scenario 2 involves:

● removal of stamp duty on non-residential properties;

● removal of land taxes; and


● reduction in payroll tax — achieved by either lowering the tax rate, or increasing the tax-free threshold, or broadening and reducing the tax rate. In the modelling, the reduction in payroll tax is simulated by broadening the tax base and reducing the tax rate.5

Change Scenario 3: Maximising State Tax Reform.

This scenario illustrates the case where the Australian and State Governments use their combined resources to make the most substantial reductions in the worst taxes. By combining State and Australian Government resources, more reform is feasible than under the other two change scenarios. Consequently, change scenario 3 involves the largest change in State taxes. In this change scenario the Australian Government’s contribution is broadly matched by the States’ contribution to reform. Specifically, change scenario 3 includes:

● the removal of stamp duty on insurance;

● removal of stamp duty on both residential and non-residential properties (compared with reduction in tax rates in Scenario 1);

● reduced land taxes — achieved by either lowering the tax rate, or increasing the tax-free threshold, or broadening and reducing the tax rate. In the modelling, the reduction in land tax is simulated by reducing the tax rate; and

● an increase in revenues raised from a broad based, uniform State tax. Other State taxes remain unaltered.

As mentioned before, these scenarios are based on input from the BCTR and are selected to illustrate the impacts of different targets, different tax mix and different amounts of reform. Notably, the tax changes presented reflect the direct costs of the reforms. The gross impact of reform does not account for changes in tax collections that might result from indirect or second round effects (adjustments that occur as the direct impacts of the tax changes which filter through the economy). For convenience, the analysis assumes that the States have access to a low, uniform, broad based tax, and this tax is used to finance the State’s contribution to this change portfolio.

5 Stamp duties on residential property, insurance and motor vehicles remained unaltered.


Change Scenario Objective Source of Funds Proposed Tax Changes (Cost of Reforms)6

(1) Raise growth

Australian Government ($10 billion): reduce stamp duties on residential and non-residential property ($7.5 billion) and remove insurance duties ($2.5 billion).

Total change: $10 billion.

(2) Enhance International Competitiveness

Australian Government ($10 billion): remove stamp duties on commercial property ($4.0 billion); remove land tax ($4.4 billion); and reduce payroll tax ($1.7 billion).

Total change: $10 billion.

(3) Maximise Elimination of the Worst State Taxes

Australian Government ($8.6 billion) and State contribution via a broad state tax ($8.6 billion); remove stamp duties on residential and non-residential property ($12.5 billion); remove insurance duties ($2.5 billion); and reduce land tax ($2.2 billion).

Total change: $17.2 billion.7

Key Points

■ Reform of significant scale is needed - change of roughly $10 billion to

$20 billion is required.

■ Reflecting many binding constraints, state tax reform has to be revenue,

expenditure and debt neutral.

■ Little can be achieved with incremental adjustments in specific taxes on a tax by-

tax basis. A strategic approach must involve change over a portfolio directed

at shaping key outcomes.

■ Three illustrative scenarios have been based on guidance from the BCTR. These focus upon raising growth, raising competitiveness and maximising state tax reform.

6 Detailed information and comprehensive analysis can be sourced from: Centre for International Economics

(CIE), State Business Tax Reform: Seeding the Tax Reform Debate, 2009. This report was prepared for the Business Coalition for Tax Reform. (www.TheCIE.com.au).

7 All scenarios assume that stamp duties on financial transactions and non-real non-residential property are removed according to the Intergovernmental Agreement timetable.


Impacts of Scenarios against Objectives = GDP Growth

The tax reform scenarios proposed by the BCTR aim to increase economic activity and/or enhance competitiveness (in terms of higher investment). The three change scenarios would generate higher GDP in the long run than would have been the case without tax reform.

Scenario 1, which aims to remove impediments to growth, would increase long run GDP by 0.6 per cent.

Scenario 2, which aims to remove impediments to investment, increases long run GDP by 0.4 per cent.

Scenario 3, which aims to maximise tax reform, has the largest impact on GDP in the long run. Under these tax changes, GDP is 1.7 per cent higher than baseline.

In each scenario, the impact on GDP increases over time. In the short run, tax reforms reduce tax and stimulate investment. As Australia imports most of its investment goods, the higher investment leads to higher imports demand. In the first few years, this higher demand for imports would put a drag on GDP. Over time however, higher investment leads to an improvement in the productive capacity of Australia, boosting the economy’s output.

Recommendation 4.1: The Victorian Government should advocate to other Australian Governments to adopt the BCTR State Tax Reform Model for comprehensive business tax reform.

Recommendation 4.2: Australian Governments should commit to a new round of business tax reform in consultation with industry, underpinned by a new IGA.

Recommendation 4.3: The Council of Australian Governments (COAG) should;

(a) set a timetable to eliminate inefficient business and property taxes with clear performance milestones;

(b) commit to a root and branch modernisation of the business tax system;

(c) commit to a new system for allocating the GST revenue between jurisdictions;

(d) set a five year target to reduce Australian Government reliance on indirect taxes;

(e) commit all States and Territories to undertake five yearly reviews of the indirect tax systems with the objective of reducing their reliance on high dead weight taxes and reducing compliance costs.

Recommendation 4.4: Australian Governments should ratify a new IGA to give effect to COAG’s tax reform program.


5. CBD Car Parking Levy

The Victorian Government legislated to levy all long stay CBD car parks from 1 January 2006. The levy started at a high rate of $400 per annum, doubled to $800 in 2007 and is now indexed to CPI. The Victorian Government collects around $40 million per year and the revenue is supposedly used towards public transport enhancements. The City of Melbourne gains $5 million per year. The levy has forced car park operators to increase all day parking rates and to recover the costs from car park users. Employers have seen this increase flow through to the market valuation for Fringe Benefits Tax (FBT) purposes and has resulted in additional FBT imposts being borne by businesses located in the CBD and adjacent areas.

The design of the levy, where the full levy is due regardless of the number of times the car parking space is used, means that once the space is used for long term parking once, the full levy is due. Such a design would mitigate against car park operators making any favourable changes in the usage pattern until the commencement of the next year. The likely result of this is minimal beneficial change will occur except where it can be achieved on 1 January in any particular year. There is not a single element of this car parking levy that the Property Council would endorse or welcome. The levy is poor policy, discriminatory and bad for Melbourne. Furthermore, the Property Council questions why a “CBD” levy should extend to Docklands, St Kilda Road, East Melbourne, Southbank, Carlton and parts of North Melbourne.

The Victorian Government has stated key policy objectives for the levy:

• reduce traffic congestion, pollution and greenhouse gas emissions in the CBD (and increase reliance on public transport);

• increase the supply of short stay off-street parking; and

• raise revenue to fund a range of public transport initiatives.

The Property Council commissioned Access Economics to assess the levy on the Victorian Government’s stated policy objectives, to assess the merits of such a levy in terms of good tax policy and traffic demand management, and to also undertake a comparison with Perth and Sydney systems.8 Access Economics found that there is a conflict between the objective of reducing congestion, pollution and greenhouse gas emissions in the CBD and increasing the availability of short stay off-street parking. If the levy encourages an expansion of short-stay places, this actually extends the period of congestion throughout the day by increasing the turnover of cars, accentuating the pollution and greenhouse gas emissions problem. It also undermines attempts to increase public transport use, particularly as peak hour public transport is operating at or near its capacity.

With the peak hour public transport at capacity every attempt should be made to increase patronage during the off-peak period which in turn will support the investment of additional scarce resources into the network to improve and extend the peak services. The congestion levy does the opposite by encouraging potential passengers away from public transport during the period it operates below capacity.

8 Access Economics, Melbourne Car Parking Levy: Good Policy or Revenue Grab? 2005.


Addressing Congestion

Access Economics asserts that a well considered policy to reduce congestion in the CBD would target congestion at its source and vary according to the amount of congestion caused. Economists generally favour a properly designed road pricing regime, taking into account issues such as the time of day, location and travel route and the type of vehicle.

The levy will impose costs on a sub-set of building owners and workers in the CBD, related to their use of a particular type of car park. It is based on the very weak link between congestion and some car park places. The selective nature of the charge means it does not apply to others who create congestion, pollution and greenhouse gases.

Access Economics Findings

Access Economics concluded that the proposed Melbourne levy is not good policy and should not have been introduced. Rather:

• it is at best a blunt, poorly targeted and discriminatory method of mitigating the costs associated with traffic congestion in the Melbourne CBD;

• using it to increase the supply of short stay off-street parking directly undermines its role in reducing traffic congestions and associated costs; and

• it appears more likely to be focused on raising revenue through the imposition of a new selective business tax rather than reducing congestions costs.

Other Alternatives

The Property Council supports initiatives that encourage public transport use, and a decreased reliance on motor vehicles. However, as Access Economics has determined, the car parking levy policy is flawed, and won’t achieve the Victorian Government’s stated objectives.

On a practical level, attempts to dramatically increase public transport patronage immediately are unrealistic. Much of the system, particularly the train network, is running at or near capacity, with no likelihood of a quick solution to address this problem. Much of Melbourne is not serviced properly by public transport, and therefore sections of the community have no option but to rely on their cars. There are a number of professions that simply do not lend themselves to relying on public transport, due to the number of locations a worker may travel to during the working day, or the hours of work.

If the Victorian Government is to reach its targets of increased public transport patronage, major capital will need to be invested over a number of years. The projected $40 million per annum from the car park levy will not scratch the surface. Other funding options must be explored, including the use of debt to fund infrastructure and transport upgrades (refer to section 10).

The major opportunity for Melbourne’s public transport is to improve usage during the current periods of low patronage when service frequency drops to an unacceptable level and passengers are deterred by the lack of available services. Increasing service frequency will attract patronage and reduce the need for short stay parking and decrease congestion.

Recommendation 5.1: The Victorian Government should abolish the CBD car parking levy.


6. Rates and Valuations

Members of the Property Council are major contributors to municipal rates, particularly in the metropolitan area and the CBD. The Property Council is concerned at the lack of uniformity of rating methods applied across municipalities. Some Property Council members continue to report dramatic differences in rates to similar properties in different municipalities. The Property Council is concerned that commercial property (i.e. office, retail and industrial), regardless of its location, continues to pay a disproportionate amount of rates. This is based on a perceived ability to pay rather than on any equitable basis, for example, on the basis of services provided.

Many commercial owners already contribute significantly to Council’s revenue via the imposition of development contributions and open space contributions. It is inequitable and undesirable for a municipality to place too much reliance on its rate revenue based on a select few properties, which has the effect of creating disproportionately high rates for other properties in that municipality. The Victorian Government also needs to ensure the levels of rates charged by the various municipalities remain equitable.

Recommendation 6.1: The Victorian Government should seek from Councils a financially responsible program. The rate burden should be distributed away from the property classes that are over-taxed. Furthermore, measures should be introduced to ensure that rate increases are no greater than CPI.

Consistency and Equity across Municipalities

Commercial owners are sceptical of the ability of Councils to apply differential rates under the Capital Improved Value rating system. Councils have been given the power to levy differential rates for specific properties or property types in an effort to reach a balanced and equitable rating position. In some cases Councils have initiated differential rates to the advantage of residents at the expense of commercial property owners. The application of differential rates in these cases appears to be politically motivated rather than ensuring a fair and equitable rating base.

The role of the Victorian Government should be to ensure that the disparity which currently exists between Councils in raising rate revenue is amended, therefore providing a platform for properties to be rated on a more consistent and transparent basis. Any Council wishing to increase rate revenue at a level greater than CPI should be made to justify in detail their need to increase rates and outline their record of responsible financial management and accountability.

The Property Council represents a significant number of commercial property owners within the city. Through rate payments, commercial property owners make a large contribution to the City of Melbourne’s income. Under the current differential rate scheme, commercial property owners pay higher rates than residential owners.

The Property Council encourages the Victorian Government and Melbourne Council to alleviate the rate burden currently placed on commercial property owners to encourage rather than further discourage investment in the State.

Recommendation 6.2: The Victorian Government should take a more proactive and financially responsible role in monitoring increases in Council rates.

Recommendation 6.3: The City of Melbourne’s differential rating scheme should be revised.


7. Fire Services Levy

The Property Council takes a keen interest in the Metropolitan Fire & Emergency Services Board (MFESB), and to the extent that it impacts on the built environment, the Country Fire Authority (CFA). Our members are major contributors to the fire service revenue, both through insurance levies and municipal rate payments.

In the century since the formation of the predecessor organisation, the Metropolitan Fire Brigade (MFB) was a body to assist insurers, the expectations of the community in regard to risk and the level of service provided by government has changed. The range of services now offered and expected from a fire service has extended well beyond a property based focus on which the Board was founded. The time has come to alter the framework of this service delivery to reflect current needs and expectations. Such framework change can be achieved only through funding and organisational change consistent with government practice in other areas of service quantification and delivery.

Funding Review

For a number of years The Property Council has argued that the existing system of funding from an insurance levy is inequitable and discriminatory against those members of the community who voluntarily insure and who by legislation are required to insure.

The Victorian Government reviewed the funding arrangements in 2004 and resolved to maintain the current system. The current system is inequitable because those who insure property subsidise the fire services for those who do not. In addition, recent changes to how the fire services levy is applied to deductibles on commercial and industrial property further shifts the burden of funding fire services onto the business community.

Now that it has been five years since the last funding review of fire services the Property Council would support another review by the State Government into the funding arrangements of the MFB and CFA.

Call Out Charges and Procedures

The Property Council welcomes improved call out procedures. However, we call on the Victorian Government to reduce call out charges for false alarms. These charges were introduced in 1989 and there is now overwhelming evidence of their inequitable nature.

The Property Council and the MFB work closely together to minimise the incidence of false call outs. From the experience of Property Council members, the Fire Services’ standard practice is the use of multiple fire trucks for each call out and standard minimum $1,200 call out fee for false alarms. This is despite:

● the level of turnout in many cases not reflecting the hazard or risk involved;

● Property Council members commonly advising the fire service that there is a false alarm within minutes of the alarm sounding; and

● even “best practice” fire alarm systems used by Property Council, members are subject to occasional false alarms due to fluctuating sprinkler water levels, power fluctuations and maintenance and appropriate fire safety designs can be the issue.

To the Property Council’s knowledge, Victoria is the only state where there is an automatic fee for the first fire alarm. In the majority of States and Territories at least one false alarm


per 60 days is free, and in WA all false alarms are free within fire districts. The Property Council supports amending section 32D (1) of the Fire Brigade Act to bring Victoria in line with national policy on call out charges.

Since the Property Council and the Brigade have been working more closely to monitor the causes behind false call outs, there has been a decrease in the incidence and charge out costs of false call outs. This is a welcomed improvement. Research has shown that major commercial buildings are a very small component of the total number of false call outs, and charges should not be based on a perceived capacity to pay, but the actual level of stress placed on the system by these buildings.

Recommendation 7.1: The Victorian Government should conduct another review of the fee structure and protocol of false callouts in 2009. The Property Council believes the findings of this review should be in line with other jurisdictions where industry should be granted one false alarm callout per 60 days without charge.

8. Retail

The retail property sector accounts for nearly 3,500,000 square meters of net lettable area across Victoria. The retail tenants and businesses who occupy these buildings contribute significantly to the economy through wages, jobs and the distribution of goods and services. Striking the right regulatory balance for this sector is something governments should consider carefully in the face of tighter economic conditions and slower growth.

No Costs at Victorian Civil and Administrative Tribunal (VCAT)

The Retail Leases Act 2003 provides that a successful party at VCAT cannot get awarded costs in their favour, other than in two very limited circumstances. The Government’s rationale for this policy position is that the risk of having costs awarded against them might act as a deterrent to a tenant pursuing a claim against a landlord. Rather than providing access to justice, this policy causes significant injustice to both landlords and tenants. A party that has a strong claim is prevented from fully recovering its losses, as it has to incur its own legal costs in order to pursue the action. VCAT was established to increase access to, and decrease the cost of, justice. This policy does the complete opposite. As an alternative to allowing costs as a matter of course, the Property Council recommends that the exceptions to the "no costs rule" be freed up so as to allow more discretion for VCAT to award costs in appropriate cases.

Land Tax “Hidden”

Landlords are no longer able to recover land tax from tenants, including under options leases. The Property Council believes that this provision is extremely unfair to owners who have made an agreement with a tenant on an option.

The application of the Act to the renewal of a lease under an option granted prior to the operative date is retrospective, thus landlords would not have factored in the non-recoverability of land tax when negotiating an option for a further lease term. The parties have already entered into a commercial agreement, and therefore retrospective legislation changes the dynamics of that agreement clearly in favour of the tenant. On a wider policy level, this change in land tax recovery creates transparency issues. The Property Council


strongly believes taxes should be transparent at all times. Under the previous legislation, the cost of land tax was fully known by the landlord and tenants.

This change in policy will inevitably result in land tax recovery taking place in an indirect manner (that is, possibly through rent increases). The result is that the entire retail sector has no clear understanding of the impost of land tax on their business.

Limitations on Management Fees

The Property Council strongly objects to the Victorian Government’s proposal to limit the recovery of management fees. The success of a shopping centre as a business environment is directly related to the fact that it is an efficiently managed entity. A poorly managed centre is ultimately detrimental to the economic performance of every tenant in that centre. There are many examples of badly-run centres that have been given a new lease of life as a result of a new management team. A limitation of the recovery of management fees will inhibit the ability of new owners to turn around such centres. There should be an exception for situations where the ownership of centres changes. The Property Council was pleased with the recent determination by the Small Business Commissioner in relation to Management fees and recommends this determination should be engrossed in any future legislation. It is unclear whether they are excluded from the cap on management fees in section 49.

Recommendation 8.1: The Victorian Government should amend the following areas of the Retail Leases Act 2003: no costs at VCAT; management fees and land tax.

9. Developer Levies and Charges

Growth Areas Infrastructure Contribution (GAIC)

The Property Council has expressed concern about the proposed GAIC, which was announced in December 2008. Our concerns stem from the lack of detailed information about: how the GAIC will come into effect; how it will be collected and then distributed to fund infrastructure in our growth areas; and what infrastructure will be delivered in growth area communities.

The Property Council outlined its support for a development charge as announced in 2005 as part of A Plan for Melbourne’s Growth Areas. The crux of the support was based on: a clear nexus between the incidence of land and the size of (in dollar terms) of a development levy and the specific public infrastructure the levy is capitalising. The announcement in December 2008 does not demonstrate either of these two factors.

No matter how the GAIC is introduced, and what payment structure is recommended, the GAIC will have an affect on affordability in Victoria. Land prices for the end purchasers will increase either directly by an increase in development costs to cover the GAIC, or indirectly by an increase in wholesale land prices from the farmers to cover their GAIC liability.

If the GAIC is introduced, it should be collected at the point in the development cycle where the impact on home buyers and the viability and efficiency of the urban development industry can be minimised and best managed. This is when new titles for separate housing sites are created. If it is not able to be paid progressively, then a definite consequence will be a more volatile and less efficient industry.


A simple process, whereby the State Revenue Office (SRO) collects the levy as the titles are registered, is an efficient mechanism, with little administrative burden for collecting and administering any development contribution. The SRO would be notified by local councils upon completion of Precinct Structure Plans (PSPs) for land identified for future development and can notify the SRO in preparation for the collection of the charge upon the registration of titles.

Growth Area Council Infrastructure Contribution (GACIC)

As well as the introduction of the GAIC, the Growth Area Authority (GAA) is working with councils and developers to simplify the current process of local developer contributions currently referred to as Developer Contribution Plans (DCPs). Originally proposed as a flat monetary contribution, the Property Council is concerned the proposed model will result in developer charges in Victoria surpassing Sydney’s exorbitant costs and seriously impacting housing affordability.

In a confidential briefing, the GAA proposed that the GACIC will have two components:

1. a flat monetary contribution set in legislation for construction of works, services and facilities; and

2. a land contribution levied in accordance with the requirements of the PSP for both active and passive open space to provide local community facilities arterial roads. In some cases this will be a cash contribution and in other cases specific areas of land will be required.

The two components outlined by the GAA represent different funds and will need to be accounted for separately. The proposed GACIC recognises two different rates for residential and employment land:

1. $90,000 per net developable hectare for land other than employment land – residential or standard land; and

2. $40,000 per net developable hectare for employment land.

The fixed monetary component will be set by the Planning Minister who will have the authority to vary this amount. The contribution will be indexed to the Building and Construction Index. The fixed monetary contribution will be paid once by the land owner at the following trigger points:

• subdivision (statement of compliance) • building (building permit).

Responsibility for collecting, administering and spending the GACIC will lie with the growth area council. Funds can only be spent on items identified in the PSP.

The Property Council has reviewed the component identified as a land contribution against the Cardinia Road PSP. Based on the infrastructure list provided by the GAA, in Cardinia Road, the additional cost of the land component (open space) is estimated at $92,500 per net developable hectare **. This brings the total GACIC charge to $182,500 per net developable hectare, additional to the $95,000 GAIC.


Research from the Residential Development Council (RDC) estimates the total developer charges as follows:

Melbourne: $95,000 (GAIC) + $90,000 (GACIC) + $92,500 (**GACIC-open space) = $277,500.

Sydney: $264,000 per hectare. Brisbane: $300,000 per hectare.

These figures are based on case studies prepared for the RDC taxes and charges report using broad hectare case studies assuming a density of 12 lots per hectare.

The Property Council is concerned about the increasing development charges and the impact this will have on housing affordability and development opportunities in Melbourne’s growth areas.

Recommendation 9.1: The Victorian Government must work with key stakeholders to address issues with the implementation and delivery of infrastructure in growth areas.

Recommendation 9.2: The GAIC is levied after the completion of the Precinct Structure Plan, when the developable area of the property is known, and is paid on the first transaction on transfer of land. In the case of land which is not sold, prior to its subdivision or development, the land owner will pay the GAIC progressively at the end as part of the development process.

Recommendation 9.3: The Victorian Government should use alternatives to developer levies to finance future infrastructure. (See section 10 below)

Recommendation 9.4: Developer levies should be used as a last resort and abolished completely in the medium term.

Recommendation 9.5: These charges should be reviewed and greater consultation to take place with the development industry before any final decision on local charges is made.


10. Infrastructure and Debt

New Infrastructure Investment

The Victorian Government’s own projections indicated that Melbourne’s population will surpass earlier estimates. It is therefore essential that planning for Melbourne’s growth and investment in major infrastructure projects keeps up with the pace of population growth. There is compelling evidence that investment in public infrastructure is linked with productivity growth and economic prosperity. Failure to invest in appropriate infrastructure will undermine the economic competitiveness and the social and environmental sustainability of Victoria.

Public infrastructure investment in Australia, however, is not keeping pace with the growing needs of the economy. Public investment by governments as a share of GDP has declined over recent decades as governments appear to have squeezed infrastructure spending to achieve fiscal consolidation. The current investment in infrastructure in Victoria by the Commonwealth and the States is a combined figure of 4.1 percent of GDP.

Victoria: General Government sector net infrastructure investment

For balance, it should be noted that infrastructure spending as a share of GDP is an input measure, and by itself may be a misleading indicator of the health of the nation’s infrastructure. As well, changes that have occurred to the mix or shape of the economy mean that expenditure that was once the domain of governments now falls to the private sector, which reduces government infrastructure spending requirements. The most obvious example of this is in the area of airports, once government controlled, which by the process of privatisation are now private sector controlled. Similarly, public private partnership (PPP) arrangements, such as Eastlink, have shifted the expenditure requirement from the public sector to the private sector.


Governments have implemented a host of measures to raise funds to meet the needs of their constituent communities: • state and local taxes • user charges • producer or developer levies • government debt through bonds or other debt instruments • special purpose vehicles (SPVs) including PPP

Governments at the federal, state and local level have tended to avoid the use of debt to finance infrastructure. This reflects emphasis placed upon perceived fiscal responsibility and macro-economic stability and community preferences to constrain the tax burden. It also reflects structural factors that constrain access to efficient sources of revenue. Victoria has enjoyed a period of sustained economic growth and high levels of employment that have seen a concomitant rise in population, which has in turn placed pressure on Victoria’s transport, health and education infrastructure. A major challenge facing Victoria’s Government in the 2008-09 Budget was to address Victoria’s recent strong population growth and the infrastructure investment required to maintain strong economic growth and a high standard of service delivery.

The 2008-09 Budget announced net infrastructure investment of an average $4.3 billion in each of the next four years. However, Victoria now faces the challenge of greatly increased economic and fiscal uncertainty, given the global financial and economic crisis. An example of the effects is the impact of the crisis on the value of the investment portfolio backing Victoria’s public service superannuation schemes.

Under the 2008-09 Budget Victoria’s borrowings are expected to more than double in the four years to June 2012, increasing by $16.6 billion to a total of $30 billion. More than half of the new borrowings will be incurred by the public non-financial sector (PNFC), with sales revenue funding most of the service costs. Net debt is expected to rise from $5.7 billion in June 2008 to $22.9 billion in June 2012, which is expected to constitute 7.1 percent of gross state product (GSP).

The Property Council commissioned the Allen Consulting Group to prepare a report on the Victorian Government’s capacity to fund major infrastructure projects via debt.9 A number of options were outlined in the report highlighting that the Victorian Government has the capacity to increase its debt, even in the current economic climate, to fund major infrastructure projects.

If the economic outlook were to remain buoyant, additional borrowing in excess of $7 billion could be accommodated without posing a threat to Victoria’s AAA rating. With the current negative investment and employment outlook additional borrowing of between $2 billion and $7 billion could be accommodated. If policy decisions were made by the Victorian Government to apply user charges and modest tax increases that would not materially reduce Victoria’s relative tax competitiveness, borrowings in excess of $7 billion to finance new infrastructure investment could potentially be accommodated without threatening the State’s AAA rating.

As stated in Victoria’s 2008-09 Budget, some of the main risks to the Victorian economic projections are from higher inflation and interest rates, financial market volatility, global

9 The Allen Consulting Group, Optimal Debt Level for the State of Victoria, 2008.


economic developments and exchange rate movements. We have seen that the amount of borrowing that can be undertaken for infrastructure investment whilst achieving Standard and Poor’s AAA criteria, and the State Government’s operating surplus constraints is potentially highly sensitive to a reduction in the rate of economic growth (GSP).

On the other hand, infrastructure spending itself is likely have a positive impact on the Victoria’s GSP, and creates an environment that will help to attract further private sector investments. As noted by the Victorian Government, a well functioning infrastructure framework and a competitive taxation environment are conducive to private investment and further economic growth, and there are alternative policies such as the introduction of modest infrastructure user charges and a 5 percent increase in State taxation that could be applied to service debt for infrastructure investment.

Applying the assumptions contained in the 2008-2009 Victorian Budget and staying within the Standard and Poor’s and State Government’s constraints, the State would be able to increase debt by a total of $7 billion over the years 2009-10 to 2011-12. Analysis indicates that the base case figure of $7 billion could be higher or lower depending on different assumptions. In particular, the estimate is sensitive to a potential reduction in the State GSP under Allen’s modelling assumptions. However, a combination of modest user charges and a modest increase in taxation revenue as a percentage of GSP could accommodate a higher incremental debt/infrastructure level than $7 billion, even with a decline in GSP to an average of 2 percent over the next three years.

Recommendation 10.1: The Victorian Government should increase its debt capacity to deliver major infrastructure projects.

Recommendation 10.2: The Victorian Government should maximise government borrowing, PPPs and tax increment funding (TIF)10 to fund future infrastructure, in preference to inefficient developer levies.

Recommendation 10.3: The Victorian Government should commit to a major investment in infrastructure as a public good to address existing infrastructure deficits, cater for new population growth and drive future economic growth.

10 TIF allows a government jurisdiction to take tax revenues derived from increases in property values within a prescribed development area (TIF District) and use those ‘incremental’ tax revenues to fund the infrastructure and renewal projects that led to, or at least significantly contributed to, this property appreciation. For the property owner, there is no new tax or rise in property tax. A TIF represents a reallocation of part of the growth in property taxes to the TIF authority. Under a TIF system, the relevant government authority or jurisdiction first assesses the suitability of an area for TIF. It then defines the TIF district and produces a TIF development plan, outlines the infrastructure and development needs of the district and provides cost estimates for these works. The Property Council commissioned PricewaterhouseCoopers (PwC) to assess the potential use of TIF in Australia, which concluded that there is scope for such a system to be used. For full details refer to the PwC report: New Thinking on Infrastructure Funding, 2008.


11. Sustainability and Climate Change

In recent research by CIE for the Australian Sustainable Built Environment Council (ASBEC), the vital importance of the built environment in any abatement strategy was demonstrated.11 The built environment and its users are responsible for 23 per cent of Australia’s greenhouse gas emissions. More importantly, this study concluded that the built environment could assist to deliver deep emission cuts while sustaining growth in the overall number of buildings. Energy efficiency in the built environment should be the 'second plank' of Australia's carbon reduction strategy as it is an ideal complement to the Carbon Pollution Reduction Scheme (CPRS), which might take several years to transform market behaviour. According to research the built environment will able to deliver up to 35% in cuts to emissions by 2030. Therefore, it is imperative that barriers to achieving high environmental performance buildings are removed.

Under the Federal Government's proposed CPRS, the built environment will abate around eight megatonnes per year. But the CIE report identifies that this abatement could be increased more than seven times to around 60 megatonnes a year by 2030. The choice for Government between an eight versus 60 megatonne abatement is clear. However, key policy incentives are required to remove the barriers to retro-greening Australia's 330 million square metres of non-residential property stock, most of which is more than 25 years old.

Incentives for Sustainable Building ‘Tune Ups’

Governments often choose to regulate to force industry and the community to adopt a certain standard or practice. However, while regulation may be the proper course to take for some areas of sustainability, changing the behaviour and mind set of industry towards sustainability issues would be better achieved by the use of incentives. The Property Council has long asked for incentives to be provided to ensure that behavioural change is developed. These incentives may take a number of forms. For example, change can be delivered through the use of depreciation incentives in the tax code. While this is a necessary element of any policy to engender change, its reach would only be to those companies currently returning a profit, and as such may not reach new companies that are just starting up.

Other forms of incentives can include direct up front payment to building owners such as those currently available in the Federal Government’s Green Building Fund. The Property Council believes that any direct injection of funds to the building sector should be targeted at buildings of 2,000 sqm or above. The Property Council’s Sustainability Committee has put together a green tune ups proposal called Tune Up Victoria which details how such a proposal would work.

Recommendation 11.1: Provide assistance and incentives for building retrofits including grants, subsidies, accelerated project approvals and rebates for improvements undertaken by households and the commercial sector.

11

Centre for International Economics (CIE), The Second Plank: Building a Low Carbon Economy with Energy Efficient Buildings, 2007.


Accelerated Depreciation for Sustainable Building Upgrades

This involves the provision of accelerated depreciation allowances for building investments that involve specific energy efficient fittings, fixtures and fabric or raise the overall energy performance of the building to a specific standard. Much of the infrastructure needed to apply this approach is already in place. It would play a key role in overcoming timing gap problems, allowing investors to defer tax payments (in exchange for bringing forward energy efficiency and GHG reductions).

Accelerated depreciation provides one of the few ways to influence investment in existing buildings. Targeting, existing buildings is essential to obtain a substantial change in the building sector (given that new buildings represent only 2-3 per cent of the stock of buildings). Analysis suggests that accelerated depreciation would only need to influence a relatively small proportion of refurbishment investment to be brought forward, over that which is already projected to occur in the normal refurbishment cycle to make a significant reduction in energy demand and greenhouse gas emissions.

The capital depreciation of a base sustainable building to be increased from 2.5 % to 7.5% based on the number of green stars achieved as follows:

• 4 stars = 2.5% increase • 5 stars = 5% increase • 6 stars = 7.5% increase

The depreciation of sustainable plant and facades in new and existing buildings is accelerated by a maximum factor of 2 for new and existing buildings, which have undergone upgrades for energy, water, indoor air quality based on the number of green stars achieved as follows:

• 4 stars = factor of 1 • 5 stars = factor of 1.5 • 6 stars = factor of 2

Tax deductions currently available through the IRD Board should be extended to include innovative techniques and designs which improve environmental performance within a building above the existing rated level.

Seed funding is needed for higher levels of sustainability through subsidies and grants for:

• one off stand alone plant;

• efficiency assessments; and

• the implementation of strategies for existing buildings.

Recommendation 11.2: The Victorian Government should advocate for the provision of accelerated sustainable building depreciation through the Australian tax code providing for building investments that involve specific energy efficient fittings, fixtures and fabric or raise the overall energy performance of the building to a specific standard.


Emissions Trading

The Federal Government’s announcement of the creation of a CPRS has been welcomed by the Property Council and its members. The funds raised from this scheme will eventually form the pool from which credits and subsidies will be directed to emissions heavy industries. In this regard, Victoria is set to contribute significant amounts of greenhouse gas emissions and in turn a large share of the overall CPRS funding pool. How these funds are used will be vitally important in Victoria’s goal of becoming Australia’s sustainability capital. The Property Council has identified several areas in which these funds can be allocated to improve Victoria’s performance.

The most pressing issue facing the property sector is Victoria’s heavy reliance on brown coal as its chief source of energy. Unlike other states, which rely on other forms of coal fired power, Victoria’s use has a negative impact on building owners and developers seeking high Green Star and NABERS Energy ratings, resulting in them being disadvantaged by up to one star. The investment implications for the property sector as a result of this are significant and will result in Victoria being overlooked as an investment centre for sustainable buildings. Therefore, funds received from the CPRS should as a top priority be allocated towards improving Victoria’s renewable energy levels and assist property owners through financial instruments overcome this one star hurdle when aiming for best practice in design and as built properties. In addition, policy frameworks surrounding the recently launched feed in tariffs program in Victoria need to be altered to make the transition from a net to a gross feed in tariff model. This will act as a greater incentive to building owners to take up energy efficiency solutions such as solar and tri/cogeneration power.

Recommendation 11.3: Change the feed in tariff policy from a net to a gross feed in tariff model to provide greater financial incentive for the take up renewable energy sources.

Recommendation 11.4: The Victorian Government should advocate for a fair distribution of CPRS funds for Victoria similar to that of the GST.

Energy Efficiency

Reducing the energy use of buildings is one of the most direct ways you can reduce greenhouse gas emissions. There are a number of ways you can make significant reductions in the built environment in this important performance based criteria. Several states are in the process of implementing variants of a white certificate scheme. Having a national scheme that applies to residential and commercial elements of the building sector could minimise differences and enable a broad market on a larger, more efficient scale.

A national white certificates scheme can be applied in many ways, but an approach already tested in Australia (in NSW) works by applying energy efficiency targets to the electricity retailers. They would then be given flexibility in achieving this target by either implementing their own efficiency arrangements or purchasing efficiency certificates based on the performance of electricity customers in raising efficiency beyond a benchmark. These arrangements essentially make energy efficiency an asset that is able to be traded like a commodity and provide the building sector with an incentive to invest in additional energy efficiency. White certificates would provide a signal that would help overcome problems with bounded rationality and would place a price on externalities (where electricity savings and GHG savings are associated).

Recommendation 11.5: Expand the VEET scheme to the commercial building sector through the remittance of state duties to drive energy efficiency gains and benefit Victorian industry.


References

Access Economics, Melbourne Car Parking Levy: Good Policy or Revenue Grab? 2005.

Access Economics, Reforming Land Tax and Stamp Duty on Commercial Property in Victoria, 2008.

Allen Consulting Group, Optimal Debt Level for the State of Victoria, 2008.

Australian Government, Final Budget Outcome 2008-09, http://www.budget.gov.au, 2009.

Centre for International Economics (CIE), The Second Plank: Building a Low Carbon Economy with Energy Efficient Buildings, 2007.

Centre for International Economics (CIE), State Business Tax Reform: Seeding the Tax Reform Debate, 2009.

PricewaterhouseCoopers (PwC), New Thinking on Infrastructure Funding, 2008.

Victorian Government, A Tax System that Works for Australia: Victorian Government Submission to Australia’s Future Tax System Review, 2009.

Contact

The Property Council would be pleased to meet with the EDIC, the Department of Treasury and Finance or other Government Departments to discuss details in this submission.

Ms Jennifer Cunich Executive Director, Victoria Division Property Council of Australia Ph. 03 9650 8300 Email [email protected]

Or

Mr Mendo Kundevski Policy Advisor, Victorian Division Property Council of Australia Ph. 03 9664 4229 Email [email protected]

Documents

Inquiry into Victorian Government Taxation and Debt · 1.2: Change land tax assessment periods and land valuations in line with the financial year to ease the compliance burdens of