Taxing big land deals
How much do you think the price of land has increased around Badgerys Creek in far western Sydney, since the announcement that it would be the site of Sydney’s second airport?
“Go on,” says John Alexander, federal Liberal MP and chair of the standing committee on infrastructure, transport and cities. “Take your wildest guess.”
You can go to a single 344-hectare parcel for the answer, bought for $3.5 million in 1996 by members of the Medich family – one of whom, Ron, is in jail for murder – and sold four months ago for just under $500 million.
But that 140-fold increase is not the wildest in the area, says Alexander. Other parcels have gone up way more. Some land formerly used for dairy cattle, close to the planned metro line that will service not only the new airport but an associated “aerotropolis” and ultimately a whole new, third Sydney city centre named Bradfield, has risen in value from under $2000 an acre to $10 million an acre.
“That means it’s gone up 5000 times,” says Alexander. “That’s 500,000 per cent.”
All up, he says, billions upon billions of dollars have been transferred from the pockets of taxpayers into the pockets of a small number of lucky landowners. But he is not blaming them for that.
“What’s been wrong was that we have been very slow as a government to realise there is a loophole here ... which is a total failure of our government.”
Sydney’s airport is just the most obvious example of this failure, but there have been many others, and there will be even more as governments – state and particularly federal – spend up big on infrastructure development in the wake of Covid-19, he says.
Alexander finds it “intolerable” that the treasurer, Josh Frydenberg, announced in the budget that the government would spend “phenomenal amounts of money on infrastructure, pay for it out of debt on the basis of low interest rates, and future generations of taxpayers will pay it back”.
It is “very wrong”, he says, that his government is prepared to “impoverish future generations, for many generations”, while a small group of people “become multibillionaires”.
He says that what is needed is tax reform to claw back the windfall gains made by landowners and developers when government changes the zoning of land or embarks on the constructions of new infrastructure.
“We should have a whole regime [whereby] federally funded infrastructure should attract a contribution from those who benefit.”
Under Alexander’s ideal model, the various levels of government would agree on what he calls “plans of settlement”, and all the infrastructure that it required, and would collect the tax on any windfall super profit gains that accrued to private landholders and developers as a result, at a rate of 75 per cent.
“And the federal government should collect these monies, quarantine them, and then hypothecate them to the states – really just like the GST,” he says.
Local governments then would be able to abandon their current practices of levying development contributions as a means of funding local infrastructure and services that are required as a result of new development, he says, and claim the money instead from the relevant state governments.
The result would be fairer all around, including for developers, “because the developer gets certainty of zoning, planning, approval and infrastructure, all the things they want. And the original landowner does very nicely.”
Alexander offers the Medich family as an example. If they were taxed 75 per cent on their windfall gain from the sale of their Badgerys Creek land, $375 million would flow back to government, while they would keep the remaining $125 million sale proceeds.
“Ron would still be doing okay, wouldn’t he?” Alexander says.
Alexander’s idea is but a new variation on an old idea. Economists, planners and academics have long advocated various means of funding public infrastructure that ensure the value generated is not siphoned off by private interests.
The umbrella term is “value capture”, but that can mean many things. Capital gains tax is one form, as are the above-mentioned developer levies.
“The easiest way to do it is direct user charging,” says Ben Mason, economist with Frontier Economics. Anyone who has driven on a toll road knows how that works.
In many cases, though, such as public transport, user charges do not pay the whole bill. But those who ride the buses or trains are not the only beneficiaries, either. So are the businesses to which that infrastructure delivers people.
Mason points to London, where a new £20 billion rail line, Crossrail, has been 30 per cent funded by value capture: firstly, by businesses that benefited from the Crossrail alignment agreeing to pay higher business rates; and, secondly, by all developments across London above a certain scale paying a development levy.
Alexander cites other innovative ways to fund public transport projects – including high-speed rail – in countries such as South Korea.
In fact, it was Alexander’s interest in high-speed rail that started him thinking about value capture. Over more than a decade, through his involvement first with the Sustainable Cities Policy Task Force and subsequently the parliamentary committee he now chairs, he became convinced of its benefits, not just in moving people and freight more quickly but in easing congestion and opening up new territory for more housing.
The problem was cost. And the solution he came up with was the same one he would apply to Badgerys Creek. As development occurred along the route, government would tax it.
“You’ve got the second most expensive land in the world in Sydney, about the third or fourth most expensive in Melbourne. And the corridor in between is virtually free, can be $1000 an acre or $2000.”
Whether or not high-speed rail ever happens, the idea of value capture would bring other benefits, he and others argue. For one, it might help discourage land speculation.
Alexander says the business of buying land ahead of public infrastructure development, then reselling it to government at hugely inflated prices, “has become a huge industry now, a sophisticated industry of … profiting off the investment of the taxpayers’ monies in infrastructure”.
And with it comes corruption, says Geoffrey Watson, SC, a former counsel assisting the New South Wales Independent Commission Against Corruption.
“If you’re just talking about people lobbying, bribing, or using their influence improperly in whatever way to secure an alteration in zoning,” he says, “I would say it makes up about 25 per cent of ICAC’s work.”
Brendan Coates, economic policy program director at the Grattan Institute, is another who advocates clawing back the value of property windfalls, not just from the sale of land but from redevelopment made possible by zoning changes.
“Planning permission to redevelop property, in particular to subdivide and build up, is a right that is granted by the community to the landholder. And at the moment, we’re basically giving away that right for free,” he says.
He notes with approval the announcement in the recent Victorian budget that the benefits to property owners associated with rezoning decisions will be taxed at 50 per cent for windfalls above $500,000, with the tax phasing in from $100,000.
If only it had been done before the state had embarked on its massive urban renewal project at Fishermans Bend, he says, which is projected to provide housing and employment for some 80,000 people by 2050.
“Hundreds of millions of dollars would have flowed into Victorian government state coffers from the rezonings that saw enormous windfall gains, often to people who bought the land not very long before the decision to rezone,” says Coates.
He notes the budget changes are expected to rise a relatively small amount of $124 million over four years, “but the next time we rezone one of the big urban inner-city precincts … that will generate hundreds of millions of dollars because the land uplift that you get from those rezonings is enormous”.
Of course, such value-capture schemes have their fierce detractors. The Property Council of Australia savaged the Victorian government’s move and vowed to “fight this on all fronts”. They argue that a windfall tax was inefficient and would be passed on to homebuyers or would stop development.
But the potential benefits to government are huge. In a recent submission to the NSW Productivity Commission, Cameron Murray, a research fellow in the Henry Halloran Trust research unit at the University of Sydney, said a 75 per cent “betterment tax” could raise the state $8 billion a year.
Speaking to The Saturday Paper, Murray rejects the criticism that such a tax is inefficient. “It is actually a very good tax. You can’t avoid it, and therefore, the people who pay it, really, really hate it,” he says.
As for the claim that it will stifle development, he points to empirical evidence.
It is not widely noticed, he says, but Australia was actually the world leader in value capture.
“Ever since 1911, we’ve had a little bubble of world-class, benchmark value capture – in Canberra,” he says.
When Australia decided to build a whole new city in the middle of nowhere, to be the seat of national government, it enacted a leasehold system under which, Murray says, “every single urban site in the ACT was parcelled up and sold by the government”.
And that remains the case. “Instead of billions going to [private landowners], and them playing games and lobbying about zoning, and speculating on farmland and lobbying to have farmland become urban future development, the government does it.
“So all the gains from converting rural to urban land, everything, 100 per cent of that, goes to the public.”
The sale (or more properly leasing) of land remains a huge source of income for the ACT government. More pertinently, though, the ACT also gets a “second bite at the cherry”, capturing more value when the private sector redevelops rezoned property.
For 30 years, the ACT has imposed a 75 per cent tax on windfall gains from redevelopment. And it has not stifled development.
When Alexander lobbies his Liberal colleagues on value capture, he can point to the obscene profits made by landowners around Badgerys Creek. Or he can point out the windows of their Parliament House offices.
This article was first published in the print edition of The Saturday Paper on Jun 19, 2021 as "Windfall over".
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