The recent NSW State Budget contained some potentially big news for property buyers.

After many years of discussion, the NSW State Government is proposing to swap out upfront stamp duty for a new system of annual property tax payments.

With stamp duty one of the largest upfront costs in buying a home, there’s no doubt that this could positively impact first home buyers, homeowners and investors. We take a look at how this could affect our local property market.

Abolishing stamp duty

Stamp duty is a tax, payable to the State government as an upfront lump sum when you buy property. It’s calculated as a percentage of the purchase price and you can work out how much is payable on a property by using an online stamp duty calculator on realestate.com.au or domain.com.au.

For example, according to data from Domain.com.au, the median house price in Sydney’s City and East is $2,550,000, which results in stamp duty of $125,255. For the Inner West, where housing is a little cheaper, stamp duty would cost $75,205 on the median house price of $1,640,000.

Units are typically cheaper again, which means stamp duty costs less. But you’d still be up for $30,120 for the median unit price of $773,000 in the Inner West or $38,085 on the unit median of $950,000 in the Inner City and East.

The recent NSW Budget proposes a new system, where buyers will be able to choose between paying stamp duty in its current form or paying a smaller annual property tax that is ongoing.

If buyers chose the annual tax, that property would remain taxed each year for all of the subsequent owners. Existing owner-occupiers will not be impacted unless they purchase another property.

The current system of stamp duty would be gradually phased out and replaced completely by the new property tax by 2050.

Why change stamp duty?

When announcing the Budget in November, NSW Treasurer Dominic Perrottet said that stamp duty was “one of the biggest financial barriers to homeownership”.

He argued that the change to a property tax is “the single most important economic reform we can tackle to turn the Australian dream into NSW’s reality”.

The idea is that changing the system could make it easier for more people to buy a home and that this, in turn, will stimulate the economy.

The system of stamp duty NSW currently uses was originally introduced in 1865, and although it’s changed over the years, critics argue this tax reform is long overdue.

Because it is paid as a lump sum tax, stamp duty can be a big obstacle for home buyers and has been blamed for people like downsizers staying in the homes longer than they need to. It also slows down first home buyers wanting to get onto the property ladder as they have to save for the deposit as well as stamp duty. The large cost of stamp duty can persuade homeowners to stay put and renovate rather than moving up the property ladder. Plus, the more often you move house and buy another property, the more stamp duty you pay, so many argue that it’s not a particularly fair tax.

Would a property tax be cheaper?

The details of the State Government’s proposed property tax are yet to be finalised. However, the new system could be cheaper – depending on how long you own the property for.

For owner occupiers the new property tax would be structured a little like council rates, with a fixed annual fee plus a variable percentage rate applied to the unimproved land value of the property.

The Sydney Morning Herald reported that an analysis by the Grattan Institute showed that based on Sydney’s median property price of $1.15 million, the new property tax would be $2,230 per annum for an owner-occupier (this may rise slowly over time), compared to upfront stamp duty of $48,500. So if you held the property for up to 20 years you’d be ahead under the new system.

What else is involved in this tax reform?

  • Other proposed changes include:
  • Owner-occupiers and farmers would pay a lower annual property tax rate than property investors. Commercial property owners would pay more.
  • The new property tax would also replace NSW land tax, which is payable for residential properties over a threshold that are not a principal place of residence. The new property tax would not be the same rate as the existing land tax.
  • First home buyers will obviously no longer receive stamp duty concessions and exemptions if stamp duty is abolished. Instead, the Government is talking about introducing a $25,000 grant for these buyers, but the details are yet to be finalised.

The proposal is in the consultation phase and yet to be finalised, but the government is hoping it could be put in place by mid-2021.

The NSW government is currently seeking feedback from the public about the proposed changes and you can find out more and have your say at treasury.nsw.gov.au/property-tax-proposal.

Want more?

If you want to find out more about why Sydney’s Inner City and Inner West is a great place to live and buy real estate contact our team today.

Brad Gillespie - Property Partner

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