Since the NSW government's proposed changes to NSW property taxes, namely the replacement of stamp duty with an annual property tax, significant discussions have emerged. In an effort to make the real estate market more accessible, the government has suggested that property investors should be able to elect to pay a smaller property tax on an ongoing basis as opposed to one large upfront stamp duty payment on the acquisition of a property.
The proposed property tax would be an annual tax consisting of a fixed amount plus a rate applied to the unimproved land value of the individual property (not aggregate landholdings as with land tax). Purchasers will have the choice to opt-in to the annual tax, however, once a property is subject to property tax, subsequent owners of the same property will not be able to revert to the stamp duty option. Tax rates would vary based on the nature and use with residential owner-occupied and primary production properties paying the lowest tax rates, followed by residential investment properties, and commercial properties paying the highest rates. Price thresholds will limit the number of properties initially eligible for transition and 20% of residential properties will initially be excluded from the proposed reform. Further, protections would be imposed to prevent rent increases (to reflect any recouping of the new 'property tax) without a tenant's agreement, and finally, existing stamp duty concessions for first home buyers would be replaced with a grant of up to $25,000.00.
The removal of the substantial upfront stamp duty component to a property transaction would be beneficial to investors who wish to buy and sell on a more regular basis. The changes would also likely provide a subsidy for apartment owners. Considering land values are generally higher for houses than apartments, the annual tax would almost certainly be lower on apartments than houses and lower when considered relative to stamp duty. Overall, the changes are likely to increase investor mobility, borrowing power, and accessibility for first home buyers removing friction from transactions.
Whilst the proposal would reduce upfront acquisition costs, long-term investors subject to the property tax would likely end up paying more over time. If the proposed tax is to apply to homeowners, in the long run, property ownership could prove more expensive. An ongoing property tax could be a greater financial burden for businesses where unimproved land makes up a significant share of their property requirements. Homeowners and investors with the aim of owning property for a long period of time would also end up more out of pocket over time as a result of the perpetual tax as well as from increases in the tax rate over multiple years.
It is important for all property investors to understand the proposed amendments and to consider if and how they will affect their future investment choices and strategies should they in fact be enacted.