In the state budget for FY 2022/23 handed down this week, the NSW Government has announced the first steps towards reforming the stamp duty payable in respect of certain property transactions. Stamp duty reform has been flagged for some time, with a number of policy options outlined in the NSW Treasury Consultation Paper Buying in NSW, Building A Future, initially published in November 2020 and open for submissions until March of 2021 (Consultation Paper).
The preliminary reform announced as part of this year’s budget package, known as the “First Home Buyer Choice“, will allow eligible first home buyers the choice to either pay the traditional stamp duty, or alternatively opt-in to an annual property tax, where the property purchased is up to $1.5 million. The rationale is to reduce the hurdles to home ownership by enabling eligible purchasers to purchase a property without needing to pay the substantial and burdensome stamp duty upfront.
How will the annual property tax be calculated?
Ordinarily, stamp duty is calculated based on the dutiable value of the property, usually evidenced by the contract price. Under existing first home buyer assistance available from the NSW government, first home buyers on eligible purchases may be entitled to either a full stamp duty exemption or, where the value of the property exceeds the relevant threshold, a concessional rate of duty is applied.
Rather than paying a one-off stamp duty payment assessed on the contract price, under First Home Buyer Choice, eligible first home buyers can elect to pay an annual property tax, which will be assessed against the property and calculated by reference to its land value. This is similar to land tax which is assessed annually by reference to the unimproved capital value of the dutiable land.
If a purchaser opts-in to the annual property tax, the rates for 2022/23 are anticipated as follows:
For an owner-occupied property (which is ordinarily exempt from land tax under the existing tax model), the yearly property tax will be charged at $400.00 per annum plus 0.3 per cent of the property land value.
For an investment property, the yearly property tax will be charged at $1,500.00 per annum plus 1.1 per cent of the property land value.
The applicable tax rates will be indexed annually.
How will the annual property tax work?
As an example, if first home buyers Jack and Jill purchase an existing residential property for $1.4 million, currently the stamp duty assessed in respect of the purchase would be $61,895.00. Jack and Jill would not be eligible for a stamp duty exemption or concession as the value of the property exceeds $800,000.00.
Assuming that the land value of the same property is $820,000.00, if Jack and Jill opted in to the First Home Buyer Choice, no stamp duty would be payable on the transaction. The annual property tax payable would be $2,860.00 in the first year, if the property were used as Jack and Jill’s principal place of residence. If the same property were used as an investment property, the property tax levied at the higher rate of assessment would be $10,520.00.
By leaving the decision to first home buyers as to whether to opt into the scheme, individuals can consider which tax model would better suit their circumstances. If Jack and Jill plan only to live in their home for five years, opting into the annual property tax may better suit their needs by eliminating the cost of stamp duty and paying the lower rate of property tax each year. However, if they intend the property to be their ‘forever home’, they may find it more effective in the long term to have paid the stamp duty upfront.
Will the annual property tax run with the land?
As far as this initial reform is concerned, if a purchaser opts in to the First Home Buyer Choice scheme, the annual property tax is only applicable whilst that purchaser owns the property. On sale of the property, the tax would not run with the land, unless the next purchaser is eligible and opts into the scheme.
The Consultation Paper indicates that if there is a broader reform along similar lines (for all purchasers rather than just first home buyers), the relevant property would continue to be assessed for the property tax, meaning subsequent purchasers would not have the choice to opt in or opt out.
When do the changes come into effect?
The reforms are yet to be legislated, although the government envisages introducing the legislation in the second half of 2022, to take effect from 16 January 2023. There will be an online calculator published at that time to
This means eligible first home buyers who exchange contracts to purchase a property on or after 16 January 2023 should be able to elect to pay an annual property tax in lieu of stamp duty.
As a transitional mechanism, the government intends that first home buyers who enter into a contract between the date the legislation passes and 15 January 2023 must pay their stamp duty upfront in the usual manner but, once the scheme is enacted, may apply for a refund of the duty and to opt into the annual property tax.
Why is this important?
The First Home Buyers Choice is more accessible than existing schemes to assist first home buyers. The existing schemes only benefit first home buyers looking to purchase eligible properties under $800,000.00.
The existing stamp duty exemptions and concessions available under the First Home Buyers Assistance Scheme will continue for now, meaning first home buyers can opt into the scheme that best suits their needs. The government envisages that between the First Home Buyers Assistance Scheme and the First Home Buyer Choice, measures available to support first home buyers should reach approximately 97% of all first home buyers in the state, representing approximately 55,000 people each year.
More importantly, the First Home Buyers Choice appears to be the first step towards a major overhaul of the property tax system in New South Wales. The Consultation Paper sheds some light on this, although no doubt there may be alterations taking into account the numerous submissions received. We anticipate that the broader changes, not just those affecting first home buyers, may form part of the state election campaign in the lead up to the election in March 2023.
If you have any, questions please do not hesitate to contact our Sydney Property Team.
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