Dream crusher in mini-budget

Anna Pha

In his plays the communist writer Berthold Brecht used the 
analogy of capitalist society as a jungle to expose the 
unforgiving, rapacious "kill or be killed" law of the system. Big 
capital crushes the dreams and aspirations of working people who 
are drawn into playing the game on its terms.

Last week's NSW mini-budget provides a classic example. "Carr 
belts property investors", ran the Financial Review 
headline, with warnings that investors will flock to other 
states to avoid higher property taxes. Bob Carr's Treasurer 
Michael Egan appeared to take the big end of town by surprise.

The budget included a new tax on the sale of all properties 
except for homes and farms, and an increase in land taxes.

It also offered first-home buyers a sweetener with the removal of 
stamp duty on properties costing less than $500,000 (phasing out 
at $600,000). This amounts to a saving of $8900 on a $300,000 
home and as much as $17,990 on a $500,000 home. In recent years 
Sydney housing prices have rocketed to such an extent that such 
prices are the minimum that a worker could expect to pay for a 
modest home or flat in the suburbs.

Sounds great, especially the higher taxes on rich investors. But 
that's only part of the picture. There are many workers and 
retirees who could be hit hard by these changes.

The financial arrangements of workers have undergone, and are 
still undergoing, a substantial restructuring.

Once the majority of workers would have relied upon their weekly 
wage, had some savings in the bank, and a weekly or fortnightly 
pension (aged or superannuation) on retirement. They may have 
rented or spent most of their life paying a mortgage off. As for 
the stock market or property investments; they were seen as a 
grubby form of gambling conducted by questionable types: market 
manipulators who never stooped to do an honest day's work.

Now, as a result of the above-mentioned restructure, over 50 
percent of Australians own shares and increasingly they have 
other investments — such as from lump sum redundancy or 
superannuation payments. They are relying, or will be in the 
future, on investments for regular income and security.

Thousands of workers and retirees now have property investments 
such as units — especially those who are on the cautious side 
and prefer not to gamble on stock and futures markets.

In addition they have been encouraged to negatively gear their 
investments: use their lump sum as a deposit on property, and 
borrow the rest. The rent they receive from this property is used 
to service the loan (interest and repayment of amount borrowed). 
Under negative gearing the interest payments are tax deductible. 
The message is — sit back, your investments get paid off, 
capital appreciates and on retirement you have a good income.

That's the theory. Then the quirks of the market kick in: the 
rental cycle hits with an oversupply of rental properties, and 
the investment lies vacant or the rental income from it is forced 
down. Then the trouble starts.

At present Sydney is experiencing a glut of rental properties in 
some areas, and now Egan's changes to land taxes will place more 
pressure on investors.

Up to now there was no land tax on rental properties where the 
land value (as estimated by the government) is less than 
$317,000. That exemption is being removed. Thousands of smaller 
investors will be caught in the land tax net. Egan estimates that 
close to 250,000 people will be paying land tax for the first 
time.

Land tax for investments with land value of $200,000 will rise 
from zero dollars to $800 (0.4%). For $400,000 the land tax would 
be $1600. Where does a small investor such as a retired or 
retrenched worker find the extra money? Increase the rent? Make 
the tenants pay? Are tenants in the present market likely to pay 
$15 or $30 or more a week rent?

The scale has been restructured so that the rate changes at 
different thresholds. The possessor of a property portfolio with 
a land value of $1 million would pay $2511 less tax than before!

The tax changes cannot be considered in isolation from interest 
rates, which are set to rise. Add higher interest payments to 
land tax, lower rents and possible spells without a tenant and 
thousands of people's life savings begin to disintegrate before 
their very eyes.

If they try to sell their property (the present market is in 
decline) they face another surprise — a 2.5 percent duty on 
their sale and possibly a lower price than the original purchase 
price.

What on the surface may appear to many to be a progressive move, 
the taxing of wealth, will likely take a high toll on workers. 
This is just a taste of things to come as more and more workers 
become "small capitalists" in property, share and other 
investments.