In The News

Ending duty 'could lift share trade $36bn'

The Australian Financial Review
7 October 1994
Richard Salmons

Abolishing stamp duty could increase trading volume in the Australian sharemarket by $36 billion and provide alternative benefits to government from increased investment and more efficient markets, a securities industry conference was told yesterday.

Researchers from the Securities Industry Research Centre of Asia-Pacific said that stamp duty was the main cost that could be reduced and that its abolition could be shown to substantially increase trading volumes.

"We're trying to estimate what the hidden costs of low liquidity are," said SIRCA executive director Dr Michael Aitken. "Our market is being hamstrung by a inefficient tax."

Dr Aitken said Australia's transaction costs were lower than the UK, Singapore and Malaysia for a $100,000 round-trip trade, but higher than the United States or Hong Kong. While brokerage and exchange fees were competitive with other countries, stamp duty was the one area that could be improved, he said.

"Australia is third because of a hefty givernment charge, we're very competitive on everything else," Dr Aitken said. He referred to work by SIRCA's research director, Dr Peter Swan, which found that the size of share parcels traded was quite responsive to lower transactions costs. Every 1 per cent cut in transactions costs had increased volume by 1.2 to 1.3 per cent, he said.

"If these findings were verified it would suggest that considerable increases in trading volume would occur as a result of postulated reductions in the rate of stamp duty," Dr Swan said in a paper. He also noted that stamp duty collected $542 million per years and had grown from 9 per cent of transactions costs to brokers to 25 per cent over the last twelve years.

Dr Aitken said based on $90 billion in sharemarket turnover, stamp duty abolition could increase turnover by $38 billion. That extra activity could benefit the economy in terms of increased investment and provide alternative means for governments to increase revenue.

Also, a cut in stamp duty would yield a double benefit by reducing bid-ask spreads that imposed a hidden transactions cost on investors. "One way of getting rid of these hidden costs is to inject liquidity into the market," he said.

For example, yesterday's symposium was told that Sydney Futures Exchange transaction costs were about 10 per cent of those on the sharemarket because of the much smaller bid-ask spread in futures.

Dr Swan noted that a stamp duty cut from the present 0.3 per cent to Singapore's 0.05 per cent rate would increase trading value to $120 million. But he added that "very few major exchanges appear to be subject to stamp duty ... New Zealand is now exempt as is London and New York."

The data used for Dr Swan's study used a model based on 39,000 observations of the number of shares in weekly average parcels, the number of parcels and the brokerage cost per share between 1982 and 1986. The period was used because ofthe fall in brokerage rates due to deregulation.