NSW investigates innovative property tax to replace stamp duty

The NSW Government has released a proposal that would give property buyers the choice to either pay a large upfront cost of stamp duty (and ongoing land tax if applicable) or to pay a much smaller annual property tax.

What is the proposal?

The proposal, which was announced in the 2020 Budget but has not been finalised, is that:

• the property tax will be an annual tax on land value, and consist of a fixed amount plus a rate applied to the unimproved land value of an individual property
• buyers could choose to pay the ongoing property tax at the time of purchase, and not pay stamp duty and (where applicable) land tax. Once a property is subject to the property tax, subsequent owners must pay the property tax (rather than opting to pay stamp duty and land tax).
• it is anticipated that properties in the top 20 per cent of value would not have the option to pay a property tax but would continue to pay stamp duty and any ongoing applicable land tax. This price thresholds would limit the number of properties initially eligible for transition to keep State revenue and debt impacts within reasonable levels
• protections for renters would apply so that the property tax does not result in rent increases without a tenant’s agreement
• the proposed model will reduce the NSW Government’s revenue in the short term. Over the longer term, the property tax would be revenue neutral, collecting the same amount of revenue as stamp duty and land tax
• existing stamp duty concessions for first home buyers could be replaced with a grant of up to $25,000.

A key driver of the proposal is a desire to increase the rates of home ownership in NSW, which has fallen from around 70 per cent in the 1990s to around 64 percent today.

Why is the change proposed?

A key driver of the proposal is a desire to increase the rates of home ownership in NSW, which has fallen from around 70 per cent in the 1990s to around 64 percent today. Over that same time period the time required for a full-time worker (who earns the NSW average annual salary) to save enough for a 20 per cent deposit plus pay stamp duty has risen from around nine years to around 15 years. The NSW Government hopes that by reducing the immediate cost of stamp duty, the time to save a 20 per cent deposit will be reduced by 2½ years.

What will be the impacts?

The choice to pay stamp duty up front or pay an annual property tax will lead to different outcomes for people in different stages of their work and housing careers. For example, someone who works in an industry where they may move job locations often would be better off financially to pay an on ongoing property tax, while someone who knows they are going to stay in their home for a long period (such as a family with young children who want school stability for two decades) may be better off paying the one-off stamp duty cost (although this cohort are the ones perhaps least likely to be able to afford the stamp duty cost at this time of their lives). Older, retired households who wish to downsize would also be likely to opt out of paying a large, upfront stamp duty cost.

Overtime an increasing number of homes will not be available for stamp duty (this is because once someone converts their newly bought property to be a property tax property, no future buyer of the home can revert to paying stamp duty on the property), leading to property buyers who want to remain with stamp duty having fewer choices of properties. It will be interesting to see whether this results in ‘stamp duty properties’ having a premium in the market in the future for long-term buyers who don’t want to pay an annual property tax.