New Urban Improvement Fund will be funded by tax and rate payers

Attempts by the ACT Government to link popular sentiment about the livability of Canberra to the need for a new “developer’s tax” is a politically convenient stratagem that should be challenged.

With just over eight months to go until the next ACT Government election, the political silly season is well and truly underway.

Recently Canberrans have seen statements from members of the ACT Government who say they speak for everyone in saying we all ‘love our bush capital’. Those in government making these statements say they know we all want to enjoy Canberra as an attractive and liveable city.

Indeed we do. But linking that popular sentiment to a new “developer’s tax” is a politically convenient stratagem that should be explored.

Firstly, is this really a “developer’s tax” or is it just another tax on land owners in the ACT? The Government’s own report that it relied on to justify the tax stated that the new Lease Variation Charge will be borne by three groups of people. The report did not attempt to attribute which of the three groups of people would bear the tax, and the Government only talks about one of these groups; “developers” and calls it a “developer’s tax”, mischievously diverting attention from the impact of the tax on existing and future homeowners as identified in its own report.

The development business is an easy target for the Government. However, just like any private business, the business of developers is, unashamedly, to make a profit. Just like any other business, there is significant risk and an expectation that an appropriate return (profit) will be received for the risk for the equity that a developer needs to invest in a particular project. Just like any other business, the developer must make enough of a return to convince the banks that money should be lent against that venture.

Finally, just like any business, if the cost of one raw material required by the business increases, the business either makes less profit, negotiates to pay less for other raw materials or passes on the cost increase to its customers.

This is basic economics and obviously in the context of a development business, one of the raw materials is land. In the ACT, the land is generally owned by somebody who is not a developer, but rather a homeowner who owns a property in a redevelopment zone. The customers are future home buyers, and property investors who make available the new home for tenants.

The Government’s report specifically states that the tax will be partially borne by existing landowners as developers can now afford to pay what the previous market price was, less the new lease variation charge. Or, the new tax will be passed on to end-buyers by the developer in the form of higher prices. Or, the tax will be partially absorbed by the developer in the form of a reduced profit. The Government would like you to ignore the first two outcomes as it is politically unwise to point this out. Once thing is patently clear, if a developer buys a property from an existing landowner in a redevelopment area, the developer will now be offering less for the property than would have been the case prior to the introduction of this new tax.

This is actually easy to test. Most people in the ACT who own property either know a real estate agent or a friend who has undertaken some development activity in the past - not all of them are big, corporate developers, as many “non-developers” have actually participated in some development in the ACT. It is quite simple to ask them what they believe that the lease variation charge has done to the value of a home in a redevelopment zone.

As for future homeowners or tenants, the future is not great under this new system. Less development will occur due to the high rate of tax presenting a barrier to a developer buying a property from an existing landowner. This constricts supply, and any development that does go ahead will only do so as the developer has assessed that sufficiently higher prices can be charged to cover the new tax. It follows also that if supply is constricted that rents will go up.

Adding to these problems is that the Government has now tried to create a further smokescreen by trying to link the tax to the need to maintain and improve the infrastructure of Canberra. Isn’t this what rates and land tax are meant for?

Moreover, failure to raise the revenue planned from the lease variation charge means that the recently announced Urban Improvement Fund – to be financed by hypothecated funds from the lease variation charge – will probably never be realised. It will be interesting to see which projects are cut first. This is a dangerous stunt in an election year.

Contrary to what the Government says, the lease variation charge will not “return to the community its rightful share of development gains”. The reality is that the cost of the lease variation charge will hit existing property owners first, followed through with a hit to future home owners.

If the Urban Improvement Fund goes ahead it will have to be funded by tax and rate payers. It is time to stop calling the lease variation charge a “developer tax” and start calling it by its real name, “The New Housing Super Tax” or the “Redevelopment Zone Super Tax”.

Catherine Carter is ACT Executive Director of the Property Council of Australia