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Tax & AccountingJune 22, 2022

Tax reform (NSW): First Home Buyers opt-in to tax reform

The state government released details of its much-anticipated revamping of NSW state taxes in yesterday’s 2022-23 Budget. From 16 January 2023 the First Home Buyer Property Tax Option will enable first home buyers to choose between paying upfront stamp duty on the land transfer or a relatively small, annual property tax. The property tax is part of a Budget housing policy which includes trialling a shared equity scheme for singles and key public servants.

Owner-occupiers who opt into the property tax will be charged at a rate made up of a fixed amount of $400 plus 0.3% of the unimproved land value of the property in each year of ownership. If a property is subsequently used as a residential investment, the annual rate of property tax is $1,500 plus 1.1 per cent of the property’s unimproved value in 2022-23. It should be remembered that property tax would replace any land tax liability arising with respect to the investment property. Going forward, these rates will be indexed in alignment with average incomes rather than with land values.

The property tax option will be available to first home buyers on purchases of land worth up to $1.5 million. This means that those first home buyers fortunate enough to be buying into the top 20% of NSW residential properties will still be required to pay stamp duty.

First home buyers can still choose to pay stamp duty, an option which may appeal to those who intend holding land for a significant period. Purchasers who don’t opt-in to the property tax continue to be eligible for first home buyer stamp duty exemptions and concessions under the First Home Buyer Assistance Scheme.

Eligible first-home buyers who execute contracts in the period between enactment of the legislation and January 15 will be able to obtain refunds of stamp duty already paid.

Background

Reform of state taxation has been on the political agenda since before the 2020 state Budget, when the current Premier was the state Treasurer in the Berejiklian government. Since then, with a pandemic and more immediate economic challenges for the government to address, the proposals have bubbled away on the backburner. Numerous reviews of state taxes have concluded that stamp duty is economically inefficient and acts as a significant brake on the mobility of homeowners and the best use allocation of land. All have recommended significant reforms to improve the equity, efficiency and reliability of the tax mix in NSW.

A Treasury Progress Paper , issued in June 2021 after extended public consultation and feedback, revealed a broad view that reform of the existing system is needed, with strong support for the proposed measures from first home buyers and homeowners wanting mobility without significant transfer costs each time they purchase a home. On the other hand, other stakeholders were broadly concerned about the risk of potential annual tax rate increases over time.

What happened?

An important feature of the 2020 proposals was that properties which had been opted-in to the property tax by a purchaser would continue to be locked in for subsequent purchasers. That is, there was no option for a purchaser to opt-out of the property tax and pay stamp duty instead. This meant that the tax base for the property tax could only get larger over time, eventually including most land in NSW. The lock-in feature has not been carried through to the 2022 Budget. Accordingly, the default position for each transaction will continue to be payment of stamp duty unless the purchaser is a first home buyer who elects to opt-in to the property tax.

From a tax reform perspective, the 2022 Budget clearly reveals a much more narrowly focussed agenda than the 2021 vision. It’s worth noting that transfer duty contributed a whopping $14,624 million to state coffers in 2021-22. The Premier has stated that a move away from stamp duty would need Federal government support.

The 2020 tax reform proposals were presented as a means of reducing the drag stamp duty has on the economy. The property tax that has emerged is primarily aimed at facilitating access into the property market for most first home buyers. This may help to level up the playing field for those buyers but seems unlikely to deliver the broader economic benefits dreamt of in 2020.

  1. Source: Budget Paper no.1 Budget Statement , 21.06.2022
Alan Burn
Content Management Analyst, Wolters Kluwer Tax and Accounting, Asia Pacific
After working as a graduate for the ATO, Alan started as a writer with CCH in 1998. He now manages content for Wolters Kluwer's Australian Tax Office Rulings and writes for the Australian Master Tax Guide and the NSW Land Tax Reporter.
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