In May 2021, we discussed the proposal of the NSW Government to gradually phase out stamp duty. The idea was that buyers will have a choice to either pay stamp duty as an upfront cost or opt into paying an annual property tax.
It was stated then that once a property is subject to the annual property tax, the property would remain annually taxed for all subsequent owners. Further development and reform to this scheme has recently been announced and is set to impact first home buyers.
From 16 January 2023, eligible first home buyers who purchase a property for less than $1,500,000 will be asked whether they want to pay stamp duty or the annual property tax.
Buyers faced with this decision should be aware that if they choose the annual property tax, they will continue to pay that tax for the length of time that they own the property. As a result, it likely for someone who holds the property long term that they end up paying more than what they would have if they paid stamp duty upfront.
Alternatively, if a buyer opts to pay the annual property tax and sells the property within a few years of their purchase, there is no obligation on the buyer to pay a top up amount towards the stamp duty amount that would have been payable if the buyer elected to pay the stamp duty upfront.
Importantly, what has changed since the scheme was first introduced is that a buyer’s decision to pay the annual property tax does not bind subsequent owners of the property to also pay the annual tax. With this change, it not clear how the NSW Government will affect the phasing out of stamp duty.
What is the push for an annual property tax?
It is intended that this reform will present a more financially viable alternative for first home buyers and increase overall accessibility for those looking to enter the property market. In the backdrop of rising real estate prices and declining home ownership rates, these developments are expected to lower the up-front costs by reducing the time taken for first home buyers to accrue their required savings by 2 years.
Even with the introduction of the annual property tax early next year, stamp duty concessions for purchases up to $800,000 that are available to first home buyers today, will remain in effect.
How is the property tax calculated?
The property tax payable will be a fixed annual amount plus a rate applied to the unimproved land value of the property (in the same way council rates are determined).
As with any form of tax, this rate will gradually increase over time with indexation.
The current annual rates applicable to 2022-23 are:
For owner occupier - $400 + 0.3% of land value per year.
For investments - $1,500 + 1.1% of land value per year.
First home buyers will receive an annual property tax assessment notice, advising of payment due for that financial year. Where an owner sells the property, it is likely a pro rata adjustment will be made at settlement based on the number of days in the year the property is owned, similar to how land tax is currently adjusted for.
What are the eligibility requirements?
To be eligible, first home buyers must satisfy the below:
be over the age of 18 years;
purchase as an individual (not a company or trust);
be an Australian citizen or permanent resident;
you or your spouse must not have previously:
owned or co-owned residential property in Australia; or
received a First Home Buyer Grant or duty concessions.
purchase for less than or equal to $1.5 million; and
live in the property continuously for at least 6 months of the first 12 months of purchase.
Although the intent of the annual property tax is to assist first home buyers to enter the property market quicker, the fear is that the introduction of the annual tax will push property prices up with purchasers able to apply funds saved on account of stamp duty towards the purchase price. Whether a first home buyer should choose to pay stamp duty or incur the annual property tax will depend on their individual circumstances.
Henry William Lawyers can assist with any related enquires. Feel free to contact our people:
Ron Zucker 0410 590 111
Chelsea Woodward 0404 065 899
Anna Polhill 0431 174 352