Home buyers in Australia’s largest State may soon be able to dodge stamp duty - which is regarded as downsizing’s biggest barrier - but only if they choose to instead pay an annual bill.

As part of its 2020-21 Budget, the NSW Government has commenced consultation on a proposal to reform the State’s stamp duty system.

NSW Treasurer Dominic Perrottet said the reform had the potential to help downsizers, along with first home buyers and growing families needing a bigger home.

Stamp duty has been in place since 1865 in NSW and is required to be paid as part of a property’s purchase, based on a percentage of the property’s value. For Sydney's current median house price of $925,000, stamp duty will cost $37,252.

However, since 1990, the cost of stamp duty has increased more than seven times, while over the same time average earnings have only trebled. 

This is one of the reasons why the share of homes which are owner-occupied in NSW has fallen from 70 per cent to 64 per cent since the mid-1990s.

A survey conducted by Downsizing.com.au and LJ Hooker in 2017 found that stamp duty was Australia’s biggest barrier to downsizing

Some 30 per cent of survey respondents said paying no or a reduced amount of stamp duty would be the one incentive or change which would help them downsize.

Stamp duty is currently payable on NSW strata apartments and townhouses, and may be payable when moving into a retirement village

In its proposed policy reform, announced today, NSW is seeking to allow home buyers to choose whether they pay stamp duty, or an annual property tax. Once the annual tax option is selected, this is locked to the property for eternity.

It’s proposing the new annual tax on owner-occupied property would be 0.3 per cent of the property’s unimproved land value, plus $500.

For a property with a median land value of $410,000 in Sydney’s west (as of July 2019), this would lead to an annual bill of $1,730. 

This would compare to an upfront stamp duty payment of $27,125 on a median home worth $700,000 at Blacktown.

The proposed NSW reform represents a different approach to the Australian Capital Territory (ACT), which since 2012 has embarked on a 20-year program to progressively reduce and replace upfront stamp duty with an annual tax across all properties. This approach was endorsed in the recent ACT election.

Currently, only the ACT, Victoria, Tasmania and the Northern Territory offer stamp duty reductions for seniors or downsizers.