Stamp Duty is a substantial financial barrier for those attempting to enter or remain in the already competitive New South Wales (NSW) property market. In recognition of this, the state government has released a consultation paper which aims to replace the current stamp duty structure in NSW with a proposed new ‘property tax’. Whilst these proposed reforms are not yet a reality, the latest state budget has indicated a positive intention towards a ‘phased transition’ away from the current property tax structures in NSW in an attempt to combat the current barriers to home ownership within the booming property market.
Current Structure
Since 1865, buyers have been subject to the payment of stamp duty in all property acquisitions. Stamp duty is currently paid on a progressive scale determined on the higher of the consideration paid or value of the property being purchased. Based on this figure, the current rates of stamp duty are as follows:
|
Property value |
Stamp Duty Rate |
Property value |
|
$83,000 to $310,000 |
$1,340 plus $3.50 for every $100 over $83,000 |
$83,000 to $310,000 |
|
$310,000 to $1,033,000 |
$9,285 plus $4.50 for every $100 over $310,000 |
$310,000 to $1,033,000 |
|
Over $1,033,000 |
$41,820 plus $5.50 for every $100 over $1,033,000 |
Over $1,033,000 |
|
Over $3,101,000 |
$155,560 plus $7.00 for every $100 |
Over $3,101,000 |
^Source: New South Wales Government
With Sydney’s median house price soaring over $1.3million, it is no surprise that the NSW Government has identified reforming stamp duty as a major catalyst in making the property market more accessible to a wider range of investors.
Proposed Reforms
Stamp Duty v Property Tax
Under the proposed reforms, at the time of a purchase, a purchaser will be required to make the following election:
- payment of the traditional stamp duty assessed on the property in accordance with the above rates; or
- payment of an annual property tax.
The proposed structure of the property tax will consist of a fixed annual amount plus a rate applied to the unimproved land value of an individual property, and not the aggregate of all of an individual’s landholdings. Calculation of this amount is similar to how a local council levies annual rates to a property.
In an attempt to minimise volatility and keep total payments in line with average income growth, the government has confirmed that legislation would set out a formula by which property tax rates are adjusted to each year. In June 2021, the state government indicated that the rate structure for the new tax would see residential owner-occupiers pay an estimated annual fee of $400.00 per property plus a 0.3% tax on every dollar that the property is worth over $755,000.00. For all other investment properties (i.e. not owner occupier), the annual fee is increased to an estimated $1,500.00 per property but otherwise operates identically.
Set out below is the NSW Government’s projected figures released in the 2021 state budget:
|
Type of property |
Annual fixed fee per property |
Annual ad valorem rate (based on unimproved land value) |
|
Residential owner-occupied |
$400 |
0.3% |
|
Residential investor-owned |
$1500 |
1.1% |
|
Farmland |
$0 |
0.3% |
|
Commercial |
$0 |
2.6% |
^Source: New South Wales Government
It is important to note that one feature of the reform is that should a purchaser opt to pay the property tax for a property, each subsequent owner of said property must also pay the property tax without the option to pay stamp duty. This decision therefore becomes crucial as to whether to elect to pay stamp duty or the yearly property tax. For those buyers who frequently move or intend to sell the property in the short term, the new property tax can be advantageous, however for those owner-occupiers looking to settle down in their dream home, a one off payment of stamp duty may save money in the long term rather than an annual tax that will accumulate.
Should a purchaser pay stamp duty on the property in a traditional manner, they will not be liable for the annual property tax. Further to this, for those who have already paid stamp duty on their property in the past, they will also not be required to pay the tax.
Hardship and Vulnerability
The consultation paper has also sought to address those financially vulnerable under the proposed tax. The NSW Government has proposed to introduce ‘hardship provisions’ to ensure that no one would be required to sell their land because they could not afford to pay the property tax. One of these provisions include the ability to defer the payment of the property tax until the property is sold and funds are available.
Foreign Investors
One of the biggest losers in the new reforms would be foreign investors. Foreign investors would still need to pay surcharge stamp duty and land tax, in addition to any introduced property tax that may be levied on a property. A foreign person could acquire a property that is already paying property tax and would then be required to pay the annual property tax in addition to any foreign investor surcharges.
First Home Buyers
The state government has also proposed to replace the current First Home Buyer Assistance stamp duty scheme with a one off $25,000.00 grant for all first home property purchases up to an amount of $1million or $650,000.00 for vacant land. A figure of such will be incredibly appealing for any first home buyer deciding whether now is the time to enter the property market. The qualifying criteria for such a grant are yet to be finalised.
Too good to be true?
Whilst NSW treasurer Dominic Perrottet estimated that as a result of reform, “more than 300,000 NSW residents could achieve their dream of home ownership and gross state product would increase by 1.7 per cent”, some feedback to the consultation paper has identified concern that there the market may be flooded in such a capacity where supply cannot meet demand. Further to this, buyers now face the prospect of inheriting a property tax which runs in perpetuity with the property that they are purchasing, rather than having the option of paying a one off tax.
Perhaps most importantly, no matter the perceived short term or long term benefits, the property tax remains as its name suggests, a tax. Should the property tax come into fruition, it is crucial that each purchaser therefore assesses the pros and cons of each option in their own circumstances.
As formal reforms are proposed and gazetted by the state government, we will continue to keep you informed. Should you have any questions in relation to the proposed property tax or stamp duty generally, please contact our Property Law Department.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.
