31 May 2021

NSW property tax proposal: upfront transfer duty and land tax -vs- new annual property tax

As a property owner, you would appreciate the sheer joy that comes from having to pay thousands of dollars on top of your purchase price in the form of transfer duty (formerly known as stamp duty). No doubt transfer duty meant that you either had to reduce your buying power by the amount of the duty, or you will be paying interest on that amount over the life of your mortgage.

Housing prices are certainly booming, but as housing prices increase so too does the purchaser’s transfer duty bill. Also factor in any GST (a tax which was meant to replace stamp duty) and land tax liability, and the myriad of other taxes and expenses that flow from property ownership – and you are left with a situation where affordability is questioned, many people are giving up on the idea of owning their own home, and investment decisions may be skewed or hampered.

Even from a commercial perspective, property ownership can be risky – pre 2020, who would have thought we would have a virus dictating how much rent tenants were liable to pay? See our previous articles here.

Although it is an important source of revenue for the NSW Government, transfer duty is one of the biggest financial barriers to home ownership and mobility. The Government’s own statistics show that transfer duty adds about $34,000 to the upfront cost of buying the average NSW home, and that on average it takes 2.5 years to save for transfer duty.

The NSW Government is proposing major changes to transfer duty and has sought feedback from the public. The consultation period has closed, but the Government is yet to release any report or make any announcements.

Current situation

Transfer Duty

Transfer duty is currently payable at the following standard rates, based on the greater of the purchase price or the market value of the property. A premium duty rate is payable for residential properties worth more than $3,101,000, being $155,560 plus $7.00 for every $100 over $3,101,000.

Property value

Transfer duty rate

$0 to $14,000

$1.25 for every $100 (the minimum is $10)

$14,000 to $31,000

$175 plus $1.50 for every $100 over $14,000

$31,000 to $83,000

$430 plus $1.75 for every $100 over $31,000

$83,000 to $310,000

$1,340 plus $3.50 for every $100 over $83,000

$310,000 to $1,033,000

$9,285 plus $4.50 for every $100 over $310,000

Over $1,033,000

 $41,820 plus $5.50 for every $100 over $1,033,000

 

Land Tax

Land tax is an annual tax paid by investors and commercial property owners, based on the total value of all land held by an owner above a certain threshold. It is calculated at a rate of $100 plus 1.6 per cent of land value above the threshold (currently $755,000), up to the premium threshold (currently $4,616,000 – where the rate increases to $61,876 plus two per cent of land value above the threshold). Due to the many exemptions and the high tax-free threshold, the current system of land tax places a large tax burden on a small number of taxpayers.

Proposed reforms

The new regime would give purchasers a choice to either pay transfer duty in one upfront lump sum and land tax (if applicable), or a new annual property tax that is based on the unimproved land value (as determined by the Valuer General). Unlike land tax, the amount investors/commercial landowners would pay would be based on individual properties, not aggregate landholdings.

The following indicative rates have been proposed across four property categories:

Property type

Currently liable to stamp duty?

Currently liable to land tax?

Potential property tax rate

Owner-occupied residential property

Yes

No

$500 + 0.3% of unimproved land value

Investment residential property

Yes

Yes

$1,500 + 1.0% of unimproved land value

Primary production land (farmland)

Yes

No

$0 + 0.3% of unimproved land value

Commercial property

Yes

Yes

$0 + 2.6% of unimproved land value

 

The opt-in decision will largely depend on how long a buyer intends to hold the property. The catch is that, once a buyer ‘opts-in’ to the annual property tax, that property will be subject to the annual tax in perpetuity and all future buyers will be bound by that decision. This could mean that similar properties will sell for vastly different prices, depending on whether they are subject to transfer duty or the annual tax.

There does not appear to be any specific exemptions available under the new regime. However, the Government has indicated that:

  • Protections would apply so that the property tax does not result in rent increases without a tenant’s agreement. This could include proactive monitoring of the rental market, or legislation governing the pass-through of the property tax to residential or commercial tenants.

  • A hardship scheme would recognise that taxpayers’ financial situations can change over time and ensure that no one facing hardship needs to sell their home to meet property tax liabilities.

  • The existing stamp duty concessions for first home buyers could be replaced with a grant of up to $25,000, with the choice of paying transfer duty or the annual property tax.

  • Unless you are buying a property, there would be no change. If you have already paid stamp duty on your existing property, you would not be subject to an annual property tax (ie. there would be no double taxation).

Will organisations such as charities, emergency services and sporting clubs be exempt from the tax (as they are currently exempt from paying land tax)? Will the annual tax have any time limits, which perhaps kick in once an owner reaches a certain age/experiences a change in circumstances and has already been paying the annual tax for a number of years (avoiding negative impacts on the cost of living for the elderly)? So many questions.

The potential benefits of the new regime include cost savings for buyers, downward pressure on home prices over the longer term, a larger number of property transactions, and a boost to the NSW economy (the Government predicts the new tax could inject up to $11 billion into the economy in the first 4 years).

Some commentators have expressed doubt as to whether the proposed reforms will improve housing affordability, as land values continue to increase but wages remain stagnant. Others have called for further modelling to show the real impacts such proposal could have on groups such as first home buyers and the elderly. Some owners, particularly large investors, dread the complexity of having to deal with three taxes (stamp duty, land tax and property tax) potentially for the next 50 years (it is estimated a full transition to the new system could take that long). Others are wondering why the upfront lump sum issue can’t simply be resolved by allowing owners to pay transfer duty in instalments over a number of years.

The Government has indicated that switching to the proposed annual property tax would see a fall in revenue for NSW in the short to medium-term, but the changes would be self-funded in the long term – and ultimately revenue from the property tax would be similar to that which is collected as stamp duty and land tax. The Government is “looking at options to keep it that way”, including legislation to lock in the rates or a legislated cap on total revenue growth (similar to how council rates are set). However, legislation can be amended, and there is always a risk that a government may be tempted to tinker with the system to its own advantage.

We will keep you posted with any updates on the proposed reforms. Watch this space.

Author: Kristie Carlile

Contributing partner: Peter Barakate