New property taxes put Victoria's standing in global economy at risk

The state government’s decision last month to  increase stamp duty and land tax surcharges on foreign investors has put Victoria on the global map for all the wrong reasons.

Our state has a long history of successfully opening itself up to much needed foreign investment. When we wanted to develop Bass Strait’s oil resources, it was foreign investment which financed it. When we needed to pay down state debt in the ’90s, it was foreign investment that bought our power generation assets to fund it, and, when we needed to build CityLink to help ease worsening cross-city congestion, it was foreign businesses that helped build it.

At almost every step of our economic development, foreign participation has helped make our state stronger and more prosperous. In fact, whenever we have faced the choice between leaping forward or stepping back, Victoria has always made the right call. Until now.

Victoria’s new foreign investor taxes are a backward step that threatens our engagement with the global economy. Sadly, it is not the beginning of something positive as one might imagine. Instead, it will lead to weaker jobs growth, more expensive housing and a diminished international reputation.

These taxes are built upon three pervasive falsehoods.

The first fiction underpinning these taxes is the belief that they will help make housing more affordable. According to the government, the new taxes are designed to give locals an edge over foreign investors where they compete in the property market. The key problem with this objective is that the policy actually achieves the opposite.

Take Melbourne’s inner city apartment market. If you impose a $45,500 tax on new apartments in a market where 40 per cent of purchasers are foreigners, you won’t be tilting the playing field in favour of locals; you will risk derailing the entire market. The reason for this is simple. When you make an investment product more expensive, fewer people invest in it. While superficially this may seem like a good thing when housing is so expensive, the reality is that higher market entry costs will simply result in fewer foreigners financing local apartment construction.

Foreign investors comprise 30 to 60 per cent of apartment tower pre-commits. If you undermine that interest, fewer towers will be built. Fewer towers mean scarcer housing stock. That can only lead to one thing — higher prices and rents. This is hardly a win-win scenario for Victoria’s long-term renters and aspiring homebuyers.

The second problem is the perception that these taxes are an effective method for controlling Asian investment in Victorian real estate. The reality of this policy, however, is something very different.

The taxes which have been introduced are not just discouraging Asian investment; they are also harming Canadian pension funds, American manufacturers and German retailers. If you think this is a good thing, ask yourself this. Where would the Victorian economy be today without the Melbourne Convention Centre, Boeing or Aldi? We used to offer them tax breaks to set up here. Today, we tax them for setting up shop.

As things stand now, dozens of property transactions across the state are being reconsidered or cancelled. This is because the new taxes are making a material difference to the viability of business activity all over Victoria. Moreover, they are creating uncertainty about what could be around the corner in regard to the government’s future policy framework. Whenever one of these transactions falls over, jobs and investment into the Victorian economy are lost.

The final myth about these taxes is the belief that only foreigners will pay them. This is stubbornly incorrect. Due to mistakes in the legislation and the unwillingness of the State Revenue Office to make clear rulings on regulatory issues, Australian tenants and corporations are forced to pay these taxes despite solid assurances that they wouldn’t. The inconvenient truth is, foreign investor taxes hurt Victorian businesses because the taxes haven’t been implemented properly. Until they are, it makes little sense to be increasing them.

In the end, the most important question the Victorian community needs to ask itself is whether it is ready for the twenty-first century or not. With the world’s attention fixed upon us, now is not the time to be doubting our long term commitment to the global economy. We urge the state government to reconsider its tax position carefully.

First published in Domain, 28 May 2016