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Fixing Local Government Funding

 FIXING LOCAL GOVERNMENT FUNDING

 

“Reducing your rates”

 

Property development can be a dirty business, particularly when it comes to land-banking, which is the speciality of Australia’s largest developers.

It is the gift that keeps on giving for the Australian property developer lobby. Planning gains. Betterment. Whatever you call it, it is a multi-billion dollar give-away to the politically connected happening every year.

It works like this. Property developers buy land with the accompanying right to use it for a certain purpose, which is typically prescribed in the local council planning documents. They then lobby their mates in power to change the prescribed uses in the plan, in the process giving them a new property right which they did not pay the previous owner for. Nor did they pay the government for that new right. It was a gift.

Land-banking involves the speculative buying of large parcels of land that are currently unsuitable for development in the hope of future development potential.

We say: How well-connected you are determines how successful you will be in getting your land rezoned for higher value uses.

The Western Australia Party has called for a 25% Betterment Tax to ensure the West Australian public, not the property lobby, receive the lion’s share of benefits from land rezoning decisions.

Well-connected, lobbyist-hiring property developers make millions and millions each year from rezoning and planning decisions in local government.

At stake are the billions of dollars our local councils and state governments create out of thin air when they rezone land.

The profit is unearned, the money created by a local government decision and thus the lion’s share of it should remain with the local government i.e. rate payers.

The only reason these types of land deals escalate in value is because the government rezones them for development.

Therefore, it makes perfect policy sense for the government (taxpayers) to capture most of the value uplift.

Essentially, the government would capture 25% of the value gain, payable upon approval of the development application (i.e. approval is conditional upon payment).

So for example, if a property was worth, say, $3 million as vacant farm block and $30 million as a development, then to get approval the developer would have to pay 0.25 x ($30m – $3m) = $6.75m. The developer would still make more than 20  million gross profit on his land purchase but $6.75 million dollars that is pure windfall would now go to the public.

The existing planning setup is clearly not working effectively, resulting in corruption, and rapid land cost escalation. These costs are ultimately borne by home buyers and the younger generation, all for the benefit of a few lucky landholders and speculators who are effectively handed enormous profits courtesy of the local and state government.

In sum:  A betterment tax which was briefly considered by the Henry Tax Review, whereby rezoning triggers a fee that amounts to the value gain from rezoning, payable by the landowner at the time they choose to develop or sell the land.

Our state treasurer should introduce explicit “betterment taxes” to capture some of the windfall gains from rezoning of land.

Government permission to build higher-density housing, or convert farmland into greenfield housing land, generates large unearned windfall gains for landowners or property developers.

Taxing these windfall gains would be a particularly efficient form of taxation, would reduce the opportunities for corruption in the planning system, in local government and would enable state treasurers to refund local governments to reduce rates or fix ailing local infrastructure and services.

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