Australia: NSW property tax proposal: 8 things you should know (Part 1)

The release of the NSW 2021-22 State Budget did not announce many unexpected changes to NSW state taxes, with the exception of:

(a) a shift from duty being payable on electric vehicles to a road-user charge; and

(b) confirmation from NSW Treasurer Dominic Perrottet that "We're progressing our property tax proposal, because we know housing affordability is the challenge of a generation, and we want young people to get a foot in the door" (2021-22 Budget Speech on 22 June 2021).

On 11 June 2021, the NSW Government released their Property Tax Progress Paper (Progress Paper). The Progress Paper outlines updates since the initial consultation paper released in November 2020.

In Part 1 of our series, we set out the first 4 things you should know about the NSW Government's most recent property tax system proposal:

1. Once a property is opted into the property tax system, it stays in, and the next purchaser does not have a choice

The aim of the proposed changes to the NSW property tax system is to address housing affordability, which is characterised as the challenge of the generation, with home ownership in NSW declining.¹ The objective of the reform is "not a tax grab and has not been designed to be one now, or in the future".² The reform will reduce the NSW Government's revenue in the short term and would be revenue neutral in the longer term.

The new annual property tax is a broad 'land tax' that is based on the Unimproved Land Value (ULV). Currently, the Valuer-General determines value of land every year and issues an annual statement of land value on 1 July, which is available on its website.

A buyer (an individual, company, or trustee) will have a choice between paying:

(a) duty (and land tax where applicable). Continue to remain under the current system and have the benefit of the duty and land tax exemptions and concessions (exemptions)³; or

(b) property tax. Buyers that opt-in will no longer have the benefit of duty or land tax exemptions including the Principal Place of Residence (PPR) land tax exemption. Properties held by Charities and certain entities that are currently exempt from both duty and land tax will be exempt from paying property tax.

For buyers who opt-in, the property tax would replace both duty and land tax:
"...once a property is subject to the property tax, subsequent owners will be required to pay the property tax".⁴

The following proposed rates are taken from the Progress Paper:

In their Productivity Commission White Paper 2021, the NSW Productivity Commission provides an example of how this choice works:⁵

"... consider a young family looking to buy a house for $700,000. Under the current tax system the family would pay around $23,200 in stamp duty at the time of purchase.

If the family wanted to avoid upfront stamp duty, it could instead opt to pay the property tax.

The house has a land value of $420,000, so the annual property tax would be $1,760 ($500 plus 0.3 per cent of $420,000). When the family sold the house, the next buyer would not have a choice, and would continue to pay the property tax."

Aggregation surcharge

It is proposed that a surcharge will apply on aggregate landholdings above $1.5 million of ULV. The aggregate landholdings will not include PPR and farmland.

2. NSW Property Tax Rates levied on property class

The NSW Government has not released definitions for each of the property classes and has yet to release an Exposure Draft Legislation for comment. It is unclear if it will be released before the proposed legislation is introduced into NSW Parliament. It is envisaged that the definitions would be imported from existing provisions under the Land Tax Management Act 1956 (NSW) (LTMA) for:

(a) "Residential owner-occupied" having the same or similar meaning as "Principal Place of Residence" in Schedule 1A.

(b) "Residential investor-owned" is likely to have a definition that is same or similar to "a property zoned residential, that is not residential owner- occupied".

(c) "Farmland" having the same or similar meaning as "primary production land"  in section 10AA and/or as "land used for primary production" and other definitions under the "Transfers between Family Members" (previously the intergenerational transfers) in section 274 of the Duties Act 1997 (NSW).

(d) "Commercial" defined by reference to all other property that is neither "residential owner-occupied", "residential-investor owned" or "farmland".

Residential owner-occupied and farmland properties would pay lower rates compared to residential investment properties, which in turn would pay lower rates than commercial properties under the proposals.⁶

In the early stages of transition, a price threshold⁷ would be imposed to limit the number of properties eligible to transfer to the property tax system and overtime these thresholds would be lifted. Such a threshold system is seen as necessary to ensure the revenue and debt impact of removing duty on the NSW Government occurs at reasonable levels.

Mixed-Use Properties

The Progress Paper states that "mixed-use special rules would generally apply where there is a mixed commercial and residential use. For example, where there is an apartment above a shop, on a single property title".⁸ The property tax that will apply to mixed-use properties would be based on an 'apportionment factor' as determined by the Valuer-General. The commercial price threshold would apply to mix-used properties to determine the acquirer's eligibility to opt-in. The Progress Paper does not specify what this commercial price threshold is.

3. Will there be an exemption for your owner-occupied home?

Currently, there are exemptions for PPR under the land tax regime. Based on the proposed rates set out in the Progress Paper, residential owner-occupied properties under the NSW property tax regime are subject to the proposed annual property tax, noting the residential owner-occupied property is the lowest rate.

Using the same example in point (1) above, if the young family anticipated to live in the home for 14 years or more, assuming a steady annual property tax rate of $1,760 per year (ignoring indexation)⁹. By year 14, the family would have paid a total of $24,640 in property tax, which is more than the upfront duty cost. The property will continue to be subject to property tax whereas under the current system, no annual land tax is payable for a residential owner-occupied home under the PPR exemption.

The decision to opt-in to the property tax system is likely to be more favourable to those who intend to hold the property for a shorter period of time, or wish to purchase a property sooner (as the upfront cost will be less).

4. Will any other exemptions apply to the property tax system?

Existing duty and land tax exemptions and concessions will apply to properties that are not opted-in to the property tax system and remain in the current duty and land tax system.

The Progress Paper indicates that "the Government is considering mapping existing exemptions from ... duty and land tax to the proposed property tax system using the following general guidelines."¹⁰ We have summarised these guidelines in the table below:

Most exemptions and concessions would dissipate over time as properties move into the property tax system.

Charities

Charities are currently exempt from paying duty and land tax. Under the proposed NSW property tax, properties held by charities and other entities entitled to both duty exemptions and land tax exemptions under the current regime will carry over and be exempt from property tax if they opt-in.

Farmland

Currently, certain primary production land is exempt from land tax under section 10AA of the LTMA and duty under section 274 of the Duties Act 1997 (NSW). The Progress Paper indicates that transferees of farmland that are eligible for duty (and land tax) exemption will not be given a choice to opt-in, as it is not expected to benefit them.¹¹. However other buyers of farmland (that are not entitled to the section 274 exemption) will have a choice to opt-in.

Property Developers

All developers will be offered the choice between opting in to pay property tax or pay duty (and land tax) subject to exemptions (including duty partitions and build to rent land tax exemption). If the development is opted into the property tax system, once the development is complete, each dwelling on the site would be subject to a fixed property tax charge (usually apportioned to the unit entitlement). When a residential owner-occupied property is vacated for renovation purposes, it can continue to be treated as an owner-occupied home. The progress report suggests that this is "consistent with the PPR land tax exemption which allows the continuation of the exemption in certain circumstances."¹² This indicates that the lower rate for residential owner-occupied properties (compared to residential investor owned properties) is treated as an exemption.

Foreign residents

Foreign residents will continue to be liable for duty and land tax surcharges on residential land. Under the current proposal, foreign purchasers are not eligible to opt-in a residential property to the property tax system. In the event the foreign person acquires a property that is already paying property tax, the foreign person in addition to paying the annual property tax will be liable for foreign purchaser duty surcharge and land tax surcharge (subject to exemptions).¹³

Landholder

The Progress Paper is silent on how a person with an interest in shares or units in a landholder (interest holder) can opt-in. This will be a challenge in circumstances where multiple interest holders in a single landholder do not unanimously opt-in to the property tax system.

***

The NSW Government is still accepting feedback on the Progress Paper until 30 July 2021 which will refine the final model to be implemented.

Footnotes

¹ Page 25 of the Progress Paper.

² Page 53 of the Progress Paper

³ Page 38 of the Progress Paper.

⁴ Page 37 of the Progress Paper.

⁵Page 252 of the Productivity Commission White Paper 2021.

⁶ Page 15 of the Progress Paper.

⁷ Page 15 of the Progress Paper.

⁸ Page 44 of the Progress Paper.

⁹ Page 39 of the Progress Paper.

¹⁰ Page 39 of the Progress Paper

¹¹ Page 40 of the Progress Paper.

¹² Page 44 of the Progress Paper.

¹³ Page 41 of the Progress Paper.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.