In a bid to help more Australians achieve their dream of owning their own home, the NSW Government has proposed a change in the way property tax is paid. This new plan, if approved, will give property buyers the choice to pay either stamp duty and land tax (where applicable), or a new smaller annual property tax (that would ultimately replace both stamp duty and land tax).
Stamp duty is one of the main financial barriers stopping first home buyers and next home buyers from proceeding with a property purchase. On a $1 million home, property buyers face stamp duty of approximately $40,335. However, under this new initiative, choosing to pay a new smaller annual property tax would make property ownership much more affordable and attractive to those looking to get a foot on the property ladder.
Those who have already paid stamp duty on their existing property, would not be subject to an annual property tax. This new change would only affect those buying property.
What is Stamp Duty?
Stamp duty (also known as land transfer duty) is the amount of tax you will pay on any residential or commercial property purchase. The cost of stamp duty depends on many factors including the sale price, as well as the location and whether you have bought a property before.
Stamp duty was first introduced to New South Wales in 1865 when property prices were lower relative to income and people would typically stay in one place. Originally, the average stamp duty rate was 0.5 per cent of the property value. However, stamp duty today has grown considerably faster than house prices or incomes to an average rate of 4.0 per cent, often making a home purchase just a distant dream for many. Just saving for stamp duty alone can often take an average worker at least two and a half years.
What is Land Tax?
Land tax is paid annually on 31 December on all property that you own that is above the land tax threshold. Land tax does not apply on your principal place of residence, your farm or any land you own with a total taxable value below the land tax threshold. The general threshold for land tax in 2020 is $734,000, with a land tax rate of 1.6 per cent. A premium rate of 2 per cent applies to land holdings over $4,488,000.
How much would the new annual property tax cost?
Under the new plan, residential owner-occupied and primary production properties would pay lower rates compared to residential investment properties, whilst commercial properties would face the highest rates.
Currently liable to stamp duty?
Currently liable to land tax?
Potential property tax rate
Owner-occupied residential property
$500 + 0.3 per cent of the unimproved land value
Investment residential property
$1,500 + 1 per cent of the unimproved land value
Primary production land (farmland)
$0 + 0.3 per cent of the unimproved land value
$0 + 2.6 per cent of the unimproved land value
What are the benefits of a new small annual property tax?
The removal of paying stamp duty upfront has many benefits for NSW property buyers. These benefits include:
- Boosting homeownership and making properties more achievable for both first home buyers and next home buyers looking to upsize/downsize.
- Over the long term, housing would become more affordable for all due to less pressure on home prices.
- Ability to live where you want – Stamp duty directly affects the types of properties you can afford to buy, which may be in an area far away from work meaning long commutes. This new tax will allow property buyers greater choice of where they want to live and access this property sooner without the worry of having to save for another two years to be able to afford stamp duty.
- Stimulate economic recovery – The proposed changes could see an increase in the number of housing transactions, with more people entering the housing market sooner, knowing they could sell and move later without paying duty.
What are the negatives for a new small annual property tax?
The new small annual property tax could be both complex and problematic.
- A two-tiered market could emerge – this could present problems with some properties becoming less saleable than others. This is because if a buyer chooses to pay an annual property tax rather than a one-off stamp duty, all subsequent purchasers of this property will have to pay annual land tax. This is particularly bad for anyone looking to live in the property long term, as it will end up costing them more.
- Large short-term budget shortfall - This optional approach could become confusing and create a large short-term budget shortfall if more buyers opted for the land tax.
- The housing market might hit pause - With an announcement expected mid-2021 at the earliest, property buyers might wait to see what happens, before going ahead with their property purchase.
The Property Owners’ Association of NSW (POANSW) also believes that both stamp duty and land tax are inefficient revenue systems and now is the time to take a serious look at property tax reform to create a fair system for all. However, this new proposed system could be complex and problematic.
“The proposed system of variable rates based on property use would be an enforcement and administrative nightmare.
“The current proposal would see a shopkeeper who lives in a three bedroom apartment above his shop paying a different rate of property tax depending on whether he uses his third bedroom as an office or a sitting room.”
“The Government is making a rod for their own back, with a system that will be costly, and almost impossible to administer or enforce,” said John Gilmovich, President of POANSW.
To learn more about the proposed property tax changes, visit https://www.treasury.nsw.gov.au/property-tax-proposal