On Friday, 11 June, the NSW Government released a progress paper outlining initial stakeholder reaction to its proposed stamp duty reforms, along with further policy ideas.
The government is continuing to develop its proposal to give new home buyers the option of paying an annual property tax, rather than being stuck with the existing system of paying a lump sum stamp duty bill on purchase.
For owner occupiers, including downsizers buying apartments or townhouses, the property tax would be set at 0.3 per cent of the unimproved land value of the property, plus $400. This would result in an annual tax of $1,780 on a median Sydney home.
This differs to upfront stamp duty, which is calculated against the full purchase price of the property. In Sydney, the upfront stamp duty cost for a median priced dwelling is $39,000.
There are three reasons why the new annual land tax option could help downsizers.
Apartments may benefit from this reform
As noted above, the NSW Government is proposing to levy the annual tax against the unimproved value of the property - that is the land value excluding the value of any buildings or other improvements on it.
Dentons law firm partner Cameron Steele says this is important because apartments tend to have a lower unimproved land value, compared to houses.
This comes about because there can be a large number of strata apartments (ie: air space) placed on a single area of actual land, diluting the unimproved land value of each apartment.
Given that many downsizers favour apartments, the stamp duty reform could be an asset.
However, the reform is unlikely to benefit downsizers looking for lower density options, such as villas or townhouses.
As the McKell Institute said in its submission to the government: “The proposed calculation method on ‘unimproved land value’ would incentivise high-rise development by making low and medium density housing comparatively more expensive”.
Rate is lower for owner occupiers
The government’s reform would place owner occupiers such as downsizers at a comparative advantage, because the proposed annual property tax rate would be far lower than what would be applied to investors or commercial property owners.
While owner occupiers would pay an annual tax around 0.3 per cent of the unimproved land value, investors would be hit with a 1.1 per cent tax rate and commercial property owners a hefty 2.6 per cent tax rate.
This means that owner occupiers, such as downsizers, would be more likely to choose the annual tax option, rather than the existing upfront stamp duty option.
It may also give them additional buying power in the market, given they are paying less tax.
Short ownership period may favour downsizers
The reform will be designed so that, on average across all NSW properties, it will take 18 years for the annual property tax to equal the amount which would have otherwise been paid upfront.
This is no accident, given that 18 years is also the median period that a person owns a residential property in NSW, before selling it.
However, downsizers may only be living in their property for as little as 10-15 years, which means they could save money by using the annual property tax option.
The policy development process for this important reform is still ongoing.
For instance, the NSW Government has flagged that it may introduce an overall cap on revenue collected by the annual property tax, which would have the effect smoothing out wild fluctuations in property values.
What’s more, potential downsizers do have the opportunity to influence the reform by making a submission before 31 July.
It’s also important to note that stamp duty only applies to apartments and townhouses and a limited number of freehold retirement village units. It doesn’t apply to the purchase of most retirement village units, nor land lease community dwellings.
Find out more:
- Blog by Dentons law firm
- Have your say on the NSW property tax proposal progress paper
- How to slash thousands from your stamp duty bill when downsizing
- How you can downsize and avoid paying any stamp duty
Also let us know your views about the reform at [email protected]