The NSW government’s land tax announcement explained

First Home buyers, have you heard the good news?!

As part of reforms to make homeownership more affordable in NSW, first-time buyers will be given a choice between making an upfront payment or paying a smaller annual property tax.

NSW Premier Domenic Perrottet announced the First Home Buyer Choice scheme as a part of a multi-billion dollar housing package for the 2022-23 NSW budget.

Key Takeaways:

  • From January 26, 2023, first home buyers will have the option of paying an annual property tax instead of stamp duty, reducing the costs of buying a property! 
  • This reform would assist about 55,000 people annually, approximately 97% of the first home buyers in NSW.
  • “It will mean more NSW residents will get into their first home at an earlier age and achieve the great Australian dream of home ownership.”, said Matt Kean, NSW Treasury Secretary

What is the First Home Buyer Choice Scheme?

From January 16, 2023, those buying their first home will now have the option of either paying a lump sum fee or shelling out a smaller annual property tax – for properties up to $1.5 million.

Those first-time home buyers who opt-in for the property tax will pay an annual property tax of $400 plus 0.3% of the property’s land value.

For example, a property worth $1.12 million (the medium property price in Sydney) may have a land value of about $750,000, so the property owner would have to pay $2650 a year instead of $49,934 upfront.

“We want to lower the barriers to owning a home for first home buyers seeking a place of their own,”  Mr Perrottet said.

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NSW Premier Dominic Perrottet. Picture: NCA NewsWire

How will this help first home buyers?

The Premier also acknowledged that the number of first home buyers under the age of 35 had declined from 67% to 61% over the last two decades!

“We know that first home buyers are being forced to enter the property market later in life, and this reform will make the property market more accessible for them,” Mr Kean said.

For a household in NSW earning the median salary and setting aside 15% of their income, stamp duty extends the time needed to save the upfront costs of the typical NSW property by around two years.

Treasury Secretary Matt Kean said the NSW Government had allocated $728.6 million over the next four years to help first-time homebuyers. The government estimated that First Home Buyer Choice support, combined with existing first-time homebuyer programs, would assist about 55,000 people annually, approximately 97% of the first home buyers in NSW.

“It will mean more NSW residents will get into their first home at an earlier age and achieve the great Australian dream of home ownership.”

First-time homebuyers can opt-in to the scheme starting January 16 2023. For contracts exchanged between the enactment of the legislation and January 15 2023, first home buyers can apply to receive a refund of stamp duty already paid.

For properties up to $650,000, first-time homebuyers will continue to be eligible for total stamp duty exemption. There are still stamp duty concessions for properties between $650,000 and $800,000.

The Mandarin

Source: The Mandarin

So will first-time home buyers be better off paying stamp duty or property tax?

The change would reduce first-time home buyers’ upfront costs but add another bill to the household budget. However, the lower annual tax could add up over the years, if the property is kept for a longer period of time.

Domain’s new modelling shows that switching could make some first-time home buyers better off!

“It would take years for buyers to fork out property tax comparable to stamp duty, making the tax a better option for those purchasing a home for the short to medium term.” – Dr Nicola Powell, Domain’s chief of research and economics. 

For example, on a $1.5 million property, it could take 18 years to accrue the stamp duty equivalent in property tax if homeowners were to pay a proposed annual tax rate of $400, plus 0.3% of the unimproved land value.

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Source: Domain

Modelling shows an owner-occupier purchasing a $500,000 home would have to pay property tax for approximately 13 years before matching the upfront cost of stamp duty.

Residents of NSW were excited about the prospect of getting into the market with ease after the scheme was announced.

“It is easier to get in. I always have to think about that extra $10,000 or $20,000 on top of the property value. It lifts the burden of added cost,” A Potts Point renter. 

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“There’s flexibility – rather than thinking I have to create another few thousand dollars on top of the value I can afford, now you can opt for a smaller land tax. That also frees up your cash flow … I don’t need to put up a lump sum.”

Dr Powell said changing stamp duty for a property tax could increase home turnover since upfront costs may deter people from moving to a home more suited to their needs.

So what do the experts think? 

The Archer Mortgage Group’s head of mortgages, Jasjeet Makkar, said stamp duty was one of the biggest obstacles for aspiring homeowners in a hot market, adding years to save up for a deposit

“There are a lot of buyers in that boat who do not look at homes above $650,000, so they can get into the market with a small deposit,” Makkar said.

“They’re going with a 5%. If they had to pay stamp duty on top of that, they wouldn’t be able to complete the purchase.”

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The Grattan Institute’s program director for economic policy Brendan Coates says the proposal being pushed by Premier Dominic Perrottet is a positive step toward monetary reform that will benefit first-time home buyers, homebuyers and the state government.

“Stamp duty is costly because it deters families from moving house when it suits their needs, like when they want to take a better job.”

“In contrast, land taxes paid yearly do not distort people’s decisions.”

What are the limitations of the First Home Buyer Choice Scheme? 

A few economists have pointed out some limitations to this scheme. One of note is the PropTrack director of economics research Cameron Kusher saying: 

“Property prices in NSW have already slowed, with the highest-priced properties seeing the biggest drops. A scheme such as this will likely provide more support for cheaper properties. However, the impact is likely to be fairly minimal given the stronger market forces at play and expected further increases in interest rates. Hopefully, this is the first step to broader stamp duty reform in NSW.” said Cameron Kusher

AMP Capital chief economist Dr Shane Oliver said while it was a “fantastic reform” of a heavily distortionary tax that was long overdue, it could have a short-term impact of pushing up prices.

There are plenty of options for First Home Buyers!

Are you looking to buy your first home?  There are many government schemes and programs that might be available to you!

  • For properties up to $650,000, you will continue to be eligible for a full stamp duty exemption.
  • For properties valued between $650,000 and $800,000, stamp duty concessions are still available.
  • Starting from January 16, 2023, for properties up to $1.5 million, if you opt-in to the First Home Buyer Choice programme, you will not have to pay stamp duty on your purchase. Instead, property tax options will be available.

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