Tax reform: NSW proposes annual property tax as alternative to stamp duty
by Alan Burn
The last major reform to the revenue balance of NSW state taxes was the 2005 vendor duty on property investors – what, only 15 years ago? Poorly timed and unpopular, the duty impacted residential investors and superannuation funds, and was accompanied by land tax changes that reduced average annual land tax bills for some, but also created more taxpayers. The vendor duty was never able to shake off the perception that it was another capital gains tax and was shelved in 2006.
This history of the 2005 flop would not be lost on anyone proposing a shuffle of the deck in 2021. And of course, 2020 has something 2005 didn’t – an economy struggling with a crippling pandemic. Any reform in the current environment would need to be – and be seen to be – fair to taxpayers and beneficial for the state economy as a whole.
The NSW Government’s recent Budget proposes giving buyers of land the option of either paying stamp duty on the transfer of land or paying an annual “property tax” charged at much lower rates. Purchasers who opt-in to the property tax will not pay stamp duty or land tax on land subject to the new tax. In effect, this would move the tax cost for landowners away from the up-front transaction costs of buying land and onto the ongoing annual costs of holding it. Pretty much the opposite of what was done in 2005.
The proposed reform, outlined in a Treasury Consultation paper Buying In NSW, Building A Future, is aimed at reducing the drag stamp duty has on the economy. The paper notes that in recent years the increase in duty paid on property transactions, including the family home, has exceeded the increase in house prices and average incomes. 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.
The transition to the property tax would be driven over time by purchasers eager to access the property market and prepared to wear an annual tax in exchange for no tax on the transaction. Purchasers who intend holding land for a significant period may still choose to pay stamp duty. Importantly, a buyer’s decision to pay the annual tax would permanently attach to the land going forward; subsequent purchasers cannot ‘opt-out’ by choosing to pay stamp duty on their later acquisition. Once land became taxable property, it would stay taxable property.
Clearly, the intention is to phase the reform in over time and manage it through a transitional period to avoid any disruptions to the property market and tax revenue. Purchasers who pay stamp duty prior to commencement of the property tax option may be able to retrospectively opt-in and receive a refund of duty already paid. Price thresholds could apply to insure against a sudden flight of stamp duty revenue in the short term, with thresholds increasing as the change gets bedded in.
The bottom line
Suggested mechanisms for applying the tax involve a fixed charge plus a rate applied to the unimproved land value of each parcel of land separately; there would be no aggregation of land values or ownership. Commercial land owners would pay higher rates than residential investors, who would in turn pay higher rates than residential owner-occupiers and primary producers. First home buyers who opt-in to the property tax may be eligible for cash grants to compensate for the stamp duty concessions they would otherwise have received.
Based on ‘indicative’ rates in the Treasury paper, 95% of owner-occupied residential properties would incur annual property tax of less than $3,000, with most paying around $1,600 p.a. These figures are more of a mean than an average; some residential owners will pay more, not to mention investors and commercial landowners. Special protections for tenants could prevent the tax being passed on by landlords, and homeowners suffering hardship may be able to defer property tax liabilities.
The government expects the proposed reform would increase the rate of home ownership, remove a major restriction on homeowner mobility, and boost the economy by $11 billion over 4 years during a time of much-needed stimulus.
Taxpayers may be concerned at a new property tax, even at low rates, given the prospect of those rates increasing in future. As the Treasury paper notes, the rate of stamp duty when introduced in 1865 was 0.5% of dutiable value, and is now an average of 4% on today’s prices. It may also be that the savings to purchasers end up being pocketed by vendors once market prices adjust to the change.
Public comments are invited at the government’s Have Your Say site, which also offers a survey and a quick poll. At the time of writing 51% of poll respondents think the proposed changes will help them enter the housing market. While it is prudent to treat the results of small, informal polls with a high degree of caution, this is a slim margin, and in response to a carefully targeted question. It suggests that the Government has work to do in convincing the public that a new tax will do more good than harm. Never an easy sell, especially during times of economic and social stress.