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Murdoch University Electronic Journal of Law |
---------------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
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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.