Will homeowners and investors be better or worse off under the proposed NSW Stamp Duty changes?
What are the proposed NSW Stamp Duty reforms?
The NSW Government is proposing to replace Stamp Duty and Land Tax (where applicable) with a smaller annual Property Tax.
The new system is designed to reduce upfront costs on property sales and transfers. Consequently, the tax reform will also deliver stable long term tax revenue for future State Governments.
The reform will be introduced using an ‘opt in’ approach. This approach provides a choice of; a) Paying the traditional ‘once off’ Stamp Duty sum. Or b) Switching the asset to a lower but enduring annual Property Tax. It is worth noting, once a property asset has been switched to the annual Property Tax, it will remain on that system forever.
Eventually, these tax reforms should result in all NSW properties converting to the new system. Decades from now, every homeowner could be paying an annual Property Tax of a few thousand dollars. Note: The tax will be based on the unimproved land value of the property, similar to the way Land Tax works now.
So, what are the pros and cons of these new changes?
The reform is hoped to increase turnover, encouraging people to consider moving house more regularly. In theory, as lifestyles change, this should free up larger homes. It could induce people to move closer to their place of work. These are both positive outcomes for the property market from an efficiency perspective. Less commuting would also greatly benefit the environment.
However, if land values continue to increase, so too would the annual Property Tax. Future state Governments would also have the ability to increase the Property Tax rate over time. Worse still, future state Governments could make the Property Tax compulsory for all, particularly if the initial take-up rate is slow. Tax revenue expected to take a significant hit in the early years of the reform.
How will the proposed NSW stamp duty changes effect First Home Buyers?
Much of the spin has focused on reducing upfront costs for first homeowners. However, I am not convinced this argument stands up.
In the hotly contested Sydney property market, many first home purchasers will commit their allocated 4% purchasing costs towards higher bids or better offers, only pushing prices up. This is remarkably similar to the way Government grants and stimulus have contributed to house price increases in Sydney over the past few decades.
The option to save on Stamp Duty upfront, will most likely increase house prices by about 4%, whilst leaving First Home Buyers with an additional ‘ever-increasing’ annual cost.
How do the numbers stack up?
Let’s use this example; Stamp Duty on the purchase of a residential property in New South Wales valued at $1,200,000 – is presently $51,005 up front.
The proposed Property Tax in this example, would equate an annual cost of $500 + 0.3% of the land value for owner-occupied residential property. Or $1500 + 1.0% of land value for an investment residential property.
Modelling suggests owner occupiers will be financially worse off under the Property Tax after 15 years of ownership and investors much sooner. However, the Property Tax will benefit those who choose to move home more frequently.
The following table provides a comparative view of the two tax systems. In this example we have used a detached dwelling that recently sold in Parramatta.
Residential Dwelling – Hassall Street, Parramatta
Value & Taxes
Valuer General Land Value 2020
Annual Property Tax (First year)
Cost of Property Tax after 10 Years*
Cost of Property Tax after 15 years*
Cost of Property Tax after 20 years*
*Assumes an annual increase 3.8% of land value and no change to the proposed initial Property Tax rate.
We can draw a clear conclusion based on the examples above. The length of time that you intend on owning a property, will determine which tax system is of most benefit to you.
Purchasers should also take borrowing into consideration. If you have borrowed funds to pay for upfront Stamp Duty, the numbers in the examples above will change. You need to factor in interest costs on the additional borrowings.
If you do not intend on holding the property for long, it may be worth changing it to the new Property Tax. However, the impact of the tax on resale values will not be known for some time. Certainly, if you intend on holding the property for a long period of time, it looks like paying Stamp Duty up front may be your best option.
In principle, I support a tax system that is more equitable than Stamp Duty. Stamp Duty unfairly penalises people who regularly buy or transfer property. But the proposed Property Tax is sure to cost the taxpayer more in the long run and may make things worse for first home buyers in the short term.
What other alternatives could have been considered? If the Government was deeply committed to supporting first home buyers, the introduction of a payment system for Stamp Duty tax may have been of greater benefit. A payment system could allow for upfront Stamp Duty costs to be paid back over a term of five or six years, with total payback of outstanding debt if the property is sold sooner.
The NSW State Government is expected to announce its decision on the proposed tax reform in mid-2021.
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