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Re-defining the land tax base in highly urbanised locations


Despite numerous calls for land to contribute more to government revenue, the difficulty governments confront is that recurrent land taxation is assessed on a number of different bases both within Australia and internationally, and not all are economically efficient. While there is broad support for a base which reflects unimproved land value in that it reflects highest and best use since taxing it will not influence what improvements are made on the land, in practice the existing use of capital improved value is most often adopted even though it is not an economically efficient base.

If increased revenue is to be raised from an efficient land tax, the base must be efficient. While unimproved land value is an efficient base, as there are few  vacant land sales available in highly urbanised cities, there is a paucity of information and evidence on which to determine unimproved land value. As a result of this paucity tax liability assessment is neither simple nor transparent when determining land value using improved property transactions.

This paper argues that two issues must be resolved if an efficient, simple and transparent land tax is to operate in Australia. Firstly, that whether this base is land value or the value of land and improvements, the base must reflect highest and best use. Secondly, whichever base is chosen, particular attention must be given to the simplicity and transparency of the valuation process. Using simulations for land valuers, and surveys of the rationale for their responses, this paper provides insight into the relatively little understood practices and preferences of valuers when determining the unimproved land value.

The paper finds that if capital improved value highest and best use is the preferred base of land tax (given vacant land transactions are absent), then improvements must reflect highest and best use and the valuation process must be codified when accounting for the added value of improvements in a way which ensures that what results is a base which is economically efficient, simple and transparent to taxpayers, valuers and tax administrators.


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