Following the announcement in the NSW state budget on 17 November 2020, the NSW Government has commenced consultation on the proposal to transition away from the current transfer duty and land tax regimes to a single property tax model.
Based on the consultation paper released, the following is proposed:
- a purchaser of real estate will be given the choice to stay with the current regimes (i.e. pay stamp duty and, where payable, land tax), or to opt for the new property tax regime.
- the property tax would consist of a fixed amount plus a rate applied to the unimproved land value of an individual property, and not aggregate landholdings. This is the same approach as council rates.
- once a property is subject to the new property tax regime, subsequent owners of that same property must pay the property tax (i.e. there will be no choice to the purchaser)
- a price threshold may be imposed to limit the number of properties initially eligible for transition
- the property tax rates under the new regime will differ depending on the nature of the property concerned, with a lower rate applying to residential and primary production properties, a higher rate payable in relation to investment properties and even higher rates payable for commercial properties.
- safeguards will be put in place to ensure that the new property tax does not result in rent increases without a tenant’s agreement (relevant where a purchaser acquires an already tenanted property and opts for the annual property tax)
- a hardship scheme will be introduced to cover certain situations where the property owner’s financial situation changes over time and is unable to pay the annual property tax
- existing stamp duty concessions for first home buyers could be replaced with a grant of up to $25,000.
The consultation paper contains the following table outlining indicative property tax rates that could be used. The rates could include a fixed charge and a rate calculated on the unimproved land value of a property. These rates are not final and could be refined as feedback is received from the public.
|
Property Type |
Currently liable to stamp duty? |
Currently liable to land tax? |
Potential property tax rate |
|
Owner-occupied residential property |
Yes |
No |
$500 + 0.3% of unimproved land value |
|
Investment residential property |
Yes |
Yes |
$1,500 + 1.0% of unimproved land value |
|
Primary production land (farmland) |
Yes |
No |
$0 + 0.3% of unimproved land value |
|
Commercial property |
Yes |
Yes |
$0 + 2.6% of unimproved land value |
In the examples below, we consider how the property tax regime may work under different scenarios:
1. Owner-occupied Residential Property
After many years in the city raising her children, Sue has recently retired and is planning a sea change. She is looking for her ‘forever home’, which she expects to enjoy for the next 20 years.
Sue purchases a house with a market value of $700,000 with an unimproved land value of $455,000.
|
|
2021 ‘Forever home’ $700,000 |
Total State tax over 20 years |
|
Stamp duty |
$26,835 |
$26,835 |
|
Property tax |
Starting at $1,865 p/a |
$54,398* |
Difference over 20 years: $27,563
As Sue is planning to stay in the same home for the next 20 years, she decides to pay the once-off stamp duty and save $27,563 over this time.
* An (illustrative) estimated growth rate of 3.8% per year has been applied to the property tax payment.
2. Residential Property Investors
Michelle and Rob own an existing residential investment property with an unimproved land value of $566,750.
They are looking to buy a second residential investment property for $800,000 with an unimproved land value of $552,000.
They plan to sell the property after 10 years and use the profits to fund further investment properties.
As residential investors, Michelle and Rob would have the choice to pay stamp duty and land tax, or the proposed property tax.
|
|
2021 Investment property $800,000 |
Total State tax over 10 years (excluding income tax) |
|
Stamp duty and land tax |
$31,335 + Starting at $5,920 p/a |
[$31,335 + $70,420*] = $101,755 |
|
Property tax |
Starting at $7,020 p/a |
$83,505* |
Total savings over 10 years: $18,250
Michelle and Rob choose to pay the annual property tax and save $18,250 over 10 years under the proposed changes. They would also benefit from deducting property tax from their income tax.
* An (illustrative) estimated growth rate of 3.8% per year has been applied to the property tax and land tax payments.
3. Business Owner – Commercial Property
After 10 years leasing a small property, Steve is purchasing a warehouse to expand his business for a market value of $2.25 million with an unimproved land value of $1,312,500.
If his business continues to grow at its current rate, he will need to move to an even larger facility in five years. Steve could benefit from higher income tax deductions under an annual property tax.
|
|
2021 Warehouse $2.25 million |
Total tax over 5 years |
|
Stamp duty and land tax |
$108,755 + Starting at $9,356 p/a |
[$108,755 + $50,473*] = $159,228 |
|
Property tax |
Starting at $34,125 p/a |
$147,349* |
Total savings over 5 years: $11,879**
To provide the flexibility to move as his business expands, Steve chooses to pay the annual property tax and save $11,879 over five years.
* An (illustrative) estimated growth rate of 3.8% per year has been applied to the property tax and land tax payments.
** An estimated potential benefit from income tax deductions has been incorporated into the calculation.
As can be seen from the examples above, whether a purchaser would be better off under the proposed property tax regime will depend upon a few factors and will need to be carefully considered prior to making a choice.
Finalisation of the policy will depend on the feedback the Government receives from the NSW community. Following the public consultation period which ends on 15 March 2021, the policy will be developed in further detail and updates provided. The NSW Government expects that to occur in the first half of 2021.
The team at Cutcher & Neale are here to help, please get in touch if you would like further assistance.
