Proposed NSW Stamp Duty Changes: What Buyers Need to Know
Struggling to save up the necessary NSW stamp duty to purchase a home? You aren't alone.
According to the NSW Government, the average Australian takes an additional 3.5 years to save up for NSW stamp duty. Good news is this may be a thing of the past, thanks to the NSW Government Property Tax Proposal.
As part of the 2020-2021 budget, the NSW Government unveiled a proposal to gradually phase out NSW stamp duty in favour of an annual property tax. The changes will allow buyers to pay either the existing upfront NSW stamp duty or a smaller ongoing annual tax. Here is what the proposed changes mean and how to decide what is right for you.
Why are the changes being proposed?
Homeownership in NSW has steadily declined the last few years. According to the NSW Government, since 1990, NSW average earnings have trebled. However, average house prices have increased around five times, and average stamp duty on dwellings has risen more than seven times.
The increasing cost of stamp duty has become a barrier for many prospective buyers. First homeowners are often delaying purchasing their first home. And as the upfront cost required for stamp duty limits their available funds, many are sacrificing their ideal location and type of home. The NSW Government hopes that offering a lower annual property tax will remove what has become a significant barrier to purchase and make property ownership more accessible.
What is the new annual property tax?
The annual property tax will be a yearly tax based on unimproved land value (ULV). Homebuyers will have the option to pay this annual tax at the time of purchase, as an alternative to NSW stamp duty. If the property owner selects to pay the annual property tax and then sells the property, the subsequent new owner must continue paying the tax annually.
The annual property tax works similarly to council rates. The tax would include a fixed amount plus a rate applied to the ULV of the property.
Who benefits from the changes to NSW property tax?
As the proposal outlines, the changes are designed to make homeownership more accessible. However, there are factors that should be considered based on the buyer’s reason for purchase.
The annual property tax is indefinite.
In their Productivity Commission White Paper 2021, the NSW Productivity Commission provides an example of a typical annual property tax:
"… consider a young family looking to buy a house for $700,000. Under the current tax system, the family would pay around $23,200 in stamp duty at the time of purchase.
If the family wanted to avoid upfront stamp duty, it could instead opt to pay the property tax.
The house has a land value of $420,000, so the annual property tax would be $1,660 ($400 plus 0.3 percent of $420,000). When the family sold the house, the next buyer would not have a choice and would continue to pay the property tax."
This may seem like a great saving; however, consider if the buyer was looking to keep the home at a minimum of 15 years, assuming a steady annual property tax rate of $1,660 per year. By year 15, the family would have paid a total of $24,900 in property tax, which is more than the stamp duty.The type and purpose of the property will affect the annual tax amount.
The proposed annual property tax rates will differ, with owner-occupiers paying lower rates than investors, who in turn pay lower rates than commercial properties.
Those looking to purchase residential apartments in new developments will benefit the most as the overall land value will be lower. Similarly, those looking to make short-term investments in high growth areas could benefit from a lower annual tax.
However, for those looking to invest in either residential or commercial properties long-term, the higher annual fee could be prohibitive. The NSW Government is also looking into protections for tenants so that the property tax does not result in unfair rent increases.In some cases, buyers may not have a choice.
The goal is to eventually phase out NSW stamp duty, so at some point in the future you may not have a choice. The NSW Government has stated that 80% of homes will be eligible when the new plan starts. Once a property is chosen for the annual property tax, the decision is irreversible, even if there is transfer of ownership. If you purchase a home that has been under the annual property tax, you will have no choice but to continue to pay the annual tax in the future.
How can I find out what's right for me?
At the time of publication, the changes were not yet in effect. However, if you are considering purchasing a property in the next 12 months, there are resources that can help you understand your options.
Read more about the NSW Property Tax Reform: https://www.nsw.gov.au/initiative/property-tax-reform
Find your unimproved land value to calculate your annual property tax: https://www.valuergeneral.nsw.gov.au/services/lvs.htm;jsessionid=78005A52BE50CBA4484498F4CC5F77CD?execution=e1s1
Use the NSW Governments calculator tool to understand what options may be right for you: https://www.nsw.gov.au/initiative/property-tax-reform/what-this-could-mean-for-you
If you are still unsure, we recommend speaking to an expert. Depending on your financial situation and goals, you may find one option is far more suitable for you. Talking to an expert can help you make the right decision for now, and the long term.