---------------MdU Library Gopher Header Information ------------ Title : Review of Western Australian State Taxes - : Stamp Duty Author : Tax Policy Elective 1993 Organisation : School of Law, Murdoch University Language : English Keywords : STAMP DUTY, TAXATION, WESTERN AUSTRALIA, : EQUITY, EFFICIENCY, SIMPLICITY, REFORM Abstract : See abstract for Preface and Introduction Contact Name : The Editors, E Law Contact Address : Murdoch University Law School, PO Box 1014, : Canning Vale, Western Australia, 6155 Contact Phone : +61 09 360 2976 Contact Email : elaw-editors@csuvax1.murdoch.edu.au Last Verified : 25 April 1994 Last Updated : 25 April 1994 Creation Date : 25 April 1994 File Size : 34K File Type : Document File Format : ASCII Publication Status: Final COPYRIGHT POLICY : Material appearing in E Law is accepted on the basis that the material is the original, uncopied work of the author or authors. 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ISSN: 1321-8247 URL: gopher://infolib.murdoch.edu.au:70/00/.ftp/pub/subj/law/jnl/ elaw/comment/watax/chap2.txt --------------------------------------------------------------- 1 INTRODUCTION The Stamp Act 1921 (WA) imposes a tax, or "stamp duty", on documents which evidence various transactions specified in the Act. Historically, duty was only paid on transactions if transfer documents were brought into existence. This resulted in transactions being manipulated to avoid duty, with the consequence that modern legislation focuses on the nature of the transaction, rather than the documents used, to assess liability. In common with the other state taxes considered in this review, this chapter will assess stamp duty on the basis of three criteria: equity, simplicity and efficiency. Equity may be divided into `horizontal equity', which implies that taxpayers of similar financial means should pay similar amounts of tax, and `vertical equity', which posits that the wealthy should bear a greater share of the tax burden than the poor. `Simplicity', as a criterion for judging taxes, concentrates on the administration of tax collection. To rate well in this category, a tax should be inexpensive to collect; particularly in relation to the amount of revenue collected. Of general concern is the number of taxes which must be administered under the Stamp Act, and several recommendations address this point. `Efficiency' relates to the effects which a tax has on investment choices by taxpayers. For a tax to be efficient, it should not significantly distort investment patterns in the community. Under this head, particular attention must be paid to the effect of differential rates of tax in other states of Australia, which may encourage an exodus of investment funds from WA. This paper examines several items from the Second Schedule of the Stamp Act 1921 in detail. The application of each item is outlined and then assessed using the above named criteria. On the basis of this analysis recommendations are made. Recommendations are also made concerning nominal duties and exemptions. 2 CONVEYANCES Sub item 4(1) of the Second Schedule deals with transfers of land under the Transfer of Land Act (TLA) and other property, except marketable securities. Duty is levied on the value of property transferred at a progressive ad valorem rate. Currently, there is wide variation in the width of the value bands for the different rates: 0 - $80,000 1.75% $80,000 - $100,000 2.50% $100,000 - $250,000 3.25% $250,000 - $500,000 4.00% $500,000 - and over 4.25% In practice, the transfer of land is usually preceded by the completion of a written `offer and acceptance' agreement to purchase land. If this agreement is stamped, there is no need to have the formal transfer document stamped. To enhance compliance, the Department of Land Administration is prohibited from registering any transfer unless the purchase agreement or transfer is stamped (s.28 of the Act). The purchaser (transferee) is liable for the payment of duty. The purchaser has the option of assessing the duty and remitting it by post, but we understand most stamping of conveyances of residential property is done by Settlement Agents or Solicitors. Stamp duty on conveyances is the largest component of stamp duty collected in Western Australia.(1) Analysis of revenue figures produced by State Taxation for the past 10 years reveals a steady increase in the amount of revenue raised from this source.(2) In the 1992-93 financial year the $100,000 - $250,000 range contributed the greatest amount of revenue in conveyance stamp duty. 2.1 Equity Stamp duty on conveyances is narrowly based. Essentially only persons who purchase land incur the tax. Those who rent property contribute indirectly to the payment of duty by the landlord, but this does nothing to broaden the tax base. Since only relatively few people are subject to the tax, it is clearly horizontally inequitable. At first glance, the progressive scale indicates that conveyance stamp duty is vertically equitable. Since there is no exemption for the family residence, a wealthy family will pay duty at a higher rate for their expensive home than a poor family will pay for their modest abode. Although data was not available in WA, a Victorian report(3) indicated that a similar scale in that State was actually highly regressive. Notwithstanding the rate increase for higher value properties, the percentage of wealth expended on stamp duty was significantly less for those purchasing expensive properties, than for less wealthy purchasers. In addition, there is a capacity to manipulate the duty rate through an exemption being available for the reasonable value of chattels( carpets, curtains, light fittings etc.) included in the sale price of a property. One solution to the regressive nature of conveyance stamp duty would be to introduce a more steeply progressive scale, as was done in Victoria.(4) However, given the "bluntness" of taxation as a tool for implementing policy, we suggest that a flat rate of duty be imposed and that relief be given to those in need by way of government distributions. Preliminary analysis indicates that most duty is collected at the 3.25% marginal rate in WA which suggests that a uniform rate of between 3.00% and 4.00% would be appropriate. However, further research would be necessary to set the final rate. 2.2 Simplicity Such a flat rate would also make the self-assessment of duty more simple for purchasers, although this is not a significant advantage, since most duty is currently assessed and collected by Settlement Agents on behalf of State Taxation. This system is simple, with the low number of collection points being cost efficient. More complex transactions may require valuation by the Valuer General. Such valuations may cause delays, depending on the degree of difficulty and complexity involved. 2.3 Efficiency Since conveyance stamp duty is a "one off" capital cost, it is unlikely that it significantly affects investors' choices of investments. The exception to this general rule is the treatment of company restructuring for stamp duty purposes. There is a discretionary exemption from duty for companies which wish to transfer property to other companies within the same group. This discretion is rarely exercised and the procedure contrasts with the exemption given to a trust beneficiary who has property transferred from the legal title of the trustee to his or her own name.(5) The lack of a full exemption discourages reconstructions, which may result in inefficient corporate structures continuing contrary to economic criteria. 2.4 Recommendations Introduce a flat rate stamp duty on conveyances. Conduct research to determine what rate will produce required revenue levels. Compensate low income earners by grants. Formally review rate as part of the budgetary process. Include chattels in valuation of property for duty purposes to eliminate avoidance. Give exemption to company reconstructions, with a "user pays" fee to cover administrative costs incurred by State Taxation. Where a "swap" or exchange of properties in full or part settlement occurs. Treat exchanges of property as two or more separate transactions, so that punitive duty is not charged on amount of money paid for any adjustments which allow for shortfalls in exchange value. 3 MARKETABLE SECURITIES TRADED THROUGH A BROKER Sub item 4(4) of the Second Schedule deals with stamp duty payable on the transfer of (listed) shares through a broker. The total duty payable on a transfer is 0.6% of the value of shares traded. The seller and the purchaser each pay half of this amount (i.e. 0.3% each), with the seller's broker collecting the seller's portion and the buyer's broker collecting the other half. Brokers collect the tax on behalf of State Taxation and remit the duty by monthly return. The amount of revenue collected under this head is difficult to assess, because figures are combined in State Taxation reports with those for securities traded without a broker. However, the combined total is only about 4% of WA stamp duty revenue. 3.1 Equity This tax is extremely narrowly based. The Australian Stock Exchange (ASX) estimates that only 10% of Australians own shares, so that horizontal equity is poor. Vertical equity is diminished by the lack of a progressive scale, but is restored to a degree as speculators who indulge in frequent market transactions and/or "churning" of securities, bear a heavier burden of this particular tax in contrast to traditional investors who eschew a "buy and hold" strategy. 3.2 Simplicity The monthly return system promotes simplicity in the collection system, although checking for compliance is difficult in situations where different brokers act for the seller and purchaser. In a given transaction both sides of the transfer need to be matched to check compliance. Collection costs are mostly borne by brokers, who then pass the cost on to investors through increased brokerage rates. 3.3 Efficiency The relatively low rate of duty payable is unlikely to significantly affect investment decisions within Australia. However, the ASX has expressed the view that up to 40% of Australian securities investment funds are placed offshore because Australia has stamp duty where other countries do not.(6) While one of the reasons for such a decision may be because of the comparative incidence of Australian based transactions compared with an absence of tax in offshore jurisdictions, this is likely to be a very marginal effect. Other stronger reasons such as a desire to obtain an internationally diversified portfolio as part of risk minimisation strategies by fund managers, together with the opportunity to access securities and market segments, e.g. pharmaceuticals, computer technology and certain manufacturing processes are likely to dominate the placement decision. Within Australia, the rate of duty is identical to that in other States, so that there is no distortion of investment between States flowing from the existence of this transaction tax. 3.4 Recommendations Abolish this duty and replace by a broader based tax such as that suggested by the NSW Taskforce, or increase the application of an existing broad based tax, such as Financial Institutions Duty (FID). As a political and economic decision, it is considered more appropriate to expand the collection through an existing tax structure which is now settled administratively, rather than introduce and "debug" a completely new tax. It is accepted however, that the use of the FID and BAD tax base suggested cannot be increased indefinitely. Alternatively: if this head of tax is to remain Increase the rate in association with other States. Leave the rate structure as a flat rate as a progressive rate may have efficiency consequences.(7) 4 TRANSFER OF MARKETABLE SECURITIES WITHOUT A BROKER Sub item 4(3) of the Second Schedule deals with stamp duty on the transfer of marketable securities which occurs without the use of a broker. In this situation, duty is still payable at 0.6%, but the purchaser (transferee) is liable for payment of the full sum. Both parties are required to report a transaction to State Taxation, but compliance is difficult to police. If a transfer is reported, the Assessor asks each of the parties a series of questions to assess the dutiable value. In more complex cases the Valuer General is consulted. 4.1 Equity It appears that the tax base for this head of duty is even more narrow than for securities traded through a broker. There is no progressive scale, but vertical equity is less of an issue with this duty, because of its extremely narrow base. 4.2 Simplicity Assessment methods for this duty are complex and result in considerable expense for both State Taxation and the parties involved. Collection is also relatively difficult, with individual purchasers having to arrange their own payment of duty. 4.3 Efficiency This head of duty is unlikely to affect investment decisions. 4.4 Recommendations This duty should only be retained if duty on broker- traded transfers (above) continues. A minimum charge be introduced to help defray costs of assessment and collection. 5 MORTGAGES & OTHER SECURITIES Item 13 of the Second Schedule deals with a cluster of financial accommodation agreements, such as mortgages, bonds, debentures, and Bills of Sale. Duty is levied at ad valorem rates on the total amount of money borrowed: $0 - $35,000 0.25% $35,000 and over 0.40% A concessional rate of 0.25% applies to borrowings for property which is to be used as the principal residence of the borrower. Where a security instrument is for a term of life or any other indefinite period, the duty is levied at 4.25% of the amount payable annually. Nominal rates apply to certain mortgage transfers, and conveyance rates to others.(8) Duty is payable by the mortgagor, or the transferee in the case of assignment of a mortgage. Collections have remained static at 3.1% of total State taxation over the past 5 years.(9) Receipts for 1992 - 93 were $38,405,000.(10) Ninety percent of mortgage duty is collected by financial institutions and then remitted to State Taxation in monthly returns.(11) 5.1 Equity This duty has a narrow base, targeting only those who take out loans. Although a concessional rate exists at the lower end of the scale, mortgage duty is essentially regressive. Duty on large scale financing is easily avoided,(12) and this is obviously inequitable. 5.2 Simplicity Dual rates and differential rates based on the purpose of the loan increase administrative complexity and add to the cost of collection.(13) However, the cost of collection to State Taxation is low, as most duty is collected by financial institutions. Collection costs are passed on to borrowers in the form of increased loan charges. 5.3 Efficiency The mortgage is an integral part of the financial system for financing business activity and home building. In light of this, and the relatively low rate of duty, it is unlikely that mortgage duty affects investment decisions. 5.4 Recommendations Abolish duty on security instruments and replace revenue by increasing the rate of a broader based tax, such as FID/BAD while accepting the limitations on rate increases expressed in earlier recommendations in this chapter. Replace with a new charge on securities which would be "an ongoing duty rather than an up-front charge".(14) The NSW Tax Taskforce suggested such a charge, which they called a Financial Accommodations Tax (FAT),(15) but the introduction of a new tax may be politically unacceptable in WA. 6 LEASES & AGREEMENTS FOR LEASE Item 12 of the Second Schedule deals with leases and agreements to lease. Duty is levied at 0.35% of the total rent payable. If the lease agreement is for an indefinite period the rate is 0.70% of the rent payable for a whole year. In the case of a lease made in perpetuity or for a term of years or for "a period terminable with one or more lives or otherwise contingent, in consideration of a premium but without rent", duty is levied at conveyancing rates(16) Liability for duty lies with the lessee, but the administrative burden for the duty falls mainly on Real Estate Agents. Revenue received from lease duty is less than that collected from cheque duty, even though most lease rates are ad valorem. The trend over the past 5 years suggests a decrease in value of collections in real terms.(17) 6.1 Equity Lease duty has a very narrow base; its flat rates are regressive; and it adds to the costs of small business. A concession exists for residential leases under $125 per week, which promotes vertical equity, but overall it is an inequitable impost. 6.2 Simplicity The single rate for fixed term leases is simple and indefinite term leases are rare. There are few exemptions to the impost, which reduces administrative complexity. The duty is collected by a relatively small group of collectors (Real Estate Agents), which also improves simplicity. 6.3 Efficiency The existence of lease duty acts as a barrier to entry into small business, and thus may distort business investment decisions. 6.4 Recommendation Abolish lease duty and compensate by increasing FID subject to the stated limitations. 7 BILLS OF EXCHANGE & PROMISSORY NOTES Item 2 of the Second Schedule applies only to cheques, travellers cheques, money orders, payment orders and other bills payable on demand. With the introduction of FID in 1984, duty on most Bills of Exchange and Promissory Notes was abolished.(18) Duty on interstate cheques was abolished in the 1993 State Budget. Cheque duty contributes approximately $10 million to State revenue, which is only 2.5% of stamp duty collections.(19) A flat rate of 10 cents per cheque is levied, irrespective of the face value of the cheque. Duty is prepaid by the drawer and the banks remit it to State Taxation by monthly return. The nominal nature of cheque duty has resulted in the revenue from this source remaining static in absolute terms for at least the last 10 years.(20) In real terms this signifies a massive decrease in revenue. This trend will be amplified in future years with the increasing popularity of credit cards and electronic funds transfer.(21) The Australian Bankers Association (ABA) have complained that the cost of collection to the banks of cheque duty is 110% of revenue collected.(22) However, the cost of collection to State Taxation is negligible. 7.1 Equity Cheque duty discriminates against cheque users and, as debits tax is also levied on withdrawals from cheque accounts, this amounts to "double taxation". Cheque duty is a regressive tax and vertically inequitable because the rate does not vary with the value of the cheque. 7.2 Simplicity Cheque duty is "easy" to collect as most of the administrative burden falls on the Banks. However, the cost of administering refunds is prohibitive in relation to value. 7.3 Efficiency Unlikely to affect investment choices. Recommendation 7.4 Recommendations Abolish and compensate with increase in FID or by broadening the debit tax base. This proposal would bring WA into line with NSW, Victoria, Tasmania, and the ACT, where cheque duty has been abolished. 8 EXEMPTIONS In several sections within the Stamp Act including a number of specific heads not to be covered in this report and in the Third Schedule the Act deals with exemptions to stamp duty. Exemptions are applied on both an absolute and discretionary basis for designated classes of persons or transactions. Many exemptions are creatures of political compromise and result in diminution of the revenue base and must always be subject to critical scrutiny in any systemic review. They may also become irrelevant with the effluxion of time.(23) 8.1 Equity Exemptions may advantage lobby and interest groups, while reducing the revenue base. This increases the burden on those who must pay. To the extent that exemptions genuinely operate to relieve those with less capacity to pay, they may be regarded as equitable. The existence of exemptions, also opens the possibility and attractiveness of systematic avoidance mechanisms and practices. 8.2 Simplicity Exemptions add complexity to the administration of tax collection. 8.3 Efficiency Exemptions may distort investment decisions. 8.4 Recommendation Review and simplify or limit where possible. 9 NOMINAL DUTIES Nominal duties arise where particular document or set of transactions are subjected to the provisions of duty under the Stamp Act, but where the duty applied is both low in absolute monetary terms and unrelated to the underlying value of the transaction. These are transactions which the government wishes to be subject to the formal "discipline" of stamping, but which it does not consider should be subjected to the punitive impost of some level of ad valorem rate.(24) Nominal duties are applied to selective elements of the Second Schedule and again are summarised in table form and are levied on both an absolute and discretionary basis. Liability for designated classes of persons or transactions is imposed on the same logical basis as other dutiable impositions. Although it is in the public interest to ensure that documents which record essential public and commercial transactions are "visible" under the law, despite the absence of underlying value, a decision to make these items dutiable creates a significant expense to the administration of the revenue for little return. 9.1 Equity It is not meaningful to discuss nominal duties in terms of equity, since they arise (with the exception of cheque duty) more in the nature of charges for services rendered. 9.2 Simplicity Classifications add complexity and cost to administration of the Act. 9.3 Efficiency The imposition of nominal duties diminishes revenue, but is unlikely to affect investment decisions on the part of those persons entering into the transactions that fall within this category. 9.4 Recommendation Review and retain system but add a greater component of "user pays" cost recovery through setting a higher uniform rate for such items and indexing or requiring a formal budget review on a periodic basis to ensure the rates reflect the impact of general price changes. 10 CONCLUSION Conveyance duty, motor vehicle licence duty, and duty on insurance policies together amount to 80% of stamp duty revenue collected in WA. Each of these duties is regressive,(25) so that stamp duty as a whole is a regressive tax. To lessen this effect, it is strongly recommended that flat rates be used for each head of duty, despite the regressive effect. Compensation can then be made to those in need (based on a "means test") by way of government grant. It is submitted that such a system allows finer control of policy objectives, apart from revenue raising, than does a system of variable rates and exemptions. It also obviates the need for the assumption that people incur more tax because they are more wealthy - an assumption which is at the heart of progressive scales. Some duties collect relatively small sums, but are expensive to collect. Mortgage duty and cheque duty are good examples of these.(26) One solution would be to increase rates to cover costs of collection, but it is submitted that a better solution is to abolish such taxes completely and rely on broader based taxes (such as FID & BAD) to make up any shortfall. The authors recognise the limited capacity for FID to absorb evermore revenue shocks although we continue to consider that marginal adjustments to existing tax structures are preferable to the introduction of a completely new tax regime. However, it is imperative that narrowly based duties are abolished, since they severely offend both equity and simplicity criteria. The Campbell Committee Report went further by recommending the abolition of all stamp duties as part of the reform of the Australian financial system.(27) While we support this option, the absence of a comprehensive compact between the Commonwealth and the States means that WA has few alternatives for raising revenue. Consequently, until such time as WA gains access to a broad based tax which is capable of replacing the revenue from stamp duty, reforms must necessarily be limited to a rationalisation of the existing stamp duty regime and to revenue adjustments that arise as a result of changes to the balance of the State's existing revenue base. Notes: (1) Conveyance stamp duty amounted to more than $207 million in 1992-93 which represented more than 40% of stamp duty collections in that year. (2) Increases have been in both nominal and real terms, revealing growth in the size of the taxation base for conveyance stamp duty and an increase in the nominal value of land transferred. (3) Committee of Inquiry into Revenue Raising in Victoria, _Report of the Committee of Inquiry into Revenue Raising in Victoria_, Victorian Government Printer, Melbourne, 1983 (hereafter "Victorian Report"). (4) Victorian Report, p.337. (5) This appears to result form the nature of corporations, in which shareholders have neither a legal, nor a beneficial, interest in company property. (6) _Reform of the Stamp Act and its Administration_. Final Report of the Western Australian Government Working Group, July 1992 (hereafter "WA Final Report"), p.86. (7) A progressive rate could result in investors breaking large transactions into smaller transfers, or in undertaking larger investments in other fields. (8) Sub item 13(3) imposes duty at conveyance rates as an anti-avoidance measure. (9) Analysis of various State Taxation Department Annual Reports. (10) _Western Australia 1993-94 Consolidated Fund Estimates. Budget Paper No 2._ (11) State Taxation contact. (12) WA Final Report, p.80. (13) In its submission to the Working Group on Reform of the Stamp Act and its Administration the R&I Bank stated that it `employed 4 full time staff to carry out compliance and administration within its Securities Department and the equivalent of a further 5 staff in its branch networks'. The Bank estimated its costs to be approximately $400,000, or 8% of the duty it collected for the Taxation Department - WA Final Report, p.77. (14) WA Final Report, p.80. (15) Cited in the WA Final Report, p.80. (16) This is an anti-avoidance provision to prevent a de facto transfer of land being stamped at lease rates. (17) No exact figure is available for lease revenue as the Annual Reports of the Taxation Dept routinely include it under `other' receipts. `Other' accounted for less than $8Jmillion. Our contact assured us that lease duty made up most of this figure. (18) WA Final Report, p.19. (19) Consolidated Fund Estimates, p.9. (20) Comparison of Annual Reports 1982-1992. (21) WA Final Report, p.20. (22) Ibid. (23) Note the special exemption provided in S 112GE which exempted transactions through UK stock exchanges. (24) For instance, multiple duplicate copies of stampable documents Item 9 Second Schedule. (25) Motor vehicle duty is charged at a flat rate of 3.00% of the value of the vehicle, although the duty is imposed on the transfer of the licence, rather than the transfer of the vehicle, so that duty is not payable on the sale of an unlicensed vehicle. Insurance duty is also regressive, with a number of flat rates applying to different types of insurance policies. (26) Another example is the duty on "Cattle Sales Statements", which is imposed by Item 3 of the Second Schedule. This is a de facto disease and insect control program, funded by a levy on cattle sales. It is not administered by State Taxation, but the tax is nominally a stamp duty. (27) Committee of Inquiry into the Australian Financial System, _Australian Financial System Final Report_, Australian Government Printing Service, Canberra, 1981.