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Stamp duty vs Land tax: which will cost you more? - featured image
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Stamp duty vs Land tax: which will cost you more?

The NSW government has announced plans to get rid of stamp duty for first home buyers, offering buyers to pay an annual land tax payment in its place.

The new plan, effective from January 16 next year, means first home buyers in NSW will have the choice of paying the regular lump sum stamp duty payment or the annual payment on properties valued up to $1.5 million.

Those who buy a property after the bill has passed, but before the official start date, would have to pay the stamp duty but would then be eligible for a refund.

The property tax will only be payable by first home buyers who choose it, and will not apply to subsequent purchasers of a property.

Taxes2

How much is the annual land tax?

The annual property tax payments will be based on the land value of the purchased property.

The property tax rates for 2022-23 will be:

  • $400 plus 0.3% of land value for properties whose owners live in them
  • $1,500 plus 1.1% of land value for investment properties.

These tax rates will be indexed each year so that the average property tax payment rises in line with average incomes.

For a household with a median income that saves 15% of their income, stamp duty adds about two years to the time required to save the up-front costs of the median NSW dwelling.

And how much is stamp duty in NSW?

Here’s the breakdown:

Tab01

So what’s the difference?

This would mean an owner of a $1.2 million property may have a land value of about $750,000 and would need to pay $2,650 a year instead of $50,875 upfront.

Or a buyer looking to purchase a $1.5 million property could make a saving of $67,375 but not having to come up with the money upfront.

Tab02

But, buyers who opt to pay the land tax could actually end up paying significantly more by opting for the more digestible annual tax if they hold onto the property long term.

A lot more.

In fact, by around 17 years, a property owner who bought a $1.2 million property would have paid the same amount in annual taxes that they would have done paying the lump sum stamp duty payment.

Meaning every payment from then on is an additional cost.

And that would come around even faster as the annual tax increases in line with land value increases.

Why is NSW offering the choice between stamp duty and land tax?

According to NSW Premier Dominic Perrottet, Sydney’s soaring property prices are the key factor influencing the decision to offer a stamp duty alternative.

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

“In the past two decades, the share of first home buyers under 35 years of age has declined from 67% to 61%.”

And it’s a good reason given Sydney house prices have shot up 280% since 2002, according to Domain data.

And that translates to a huge 406% increase in stamp duty costs.

Wages

By comparison, wages have grown 95%.

It’s these numbers, AMP Capital chief economist Shane Oliver told the AFR, that has distorted the housing market, making it more difficult for people to enter the housing market.

“Fundamentally, the concept of land taxes is fantastic reform,” he said.

“Stamp duty is a highly distortionary tax which has adverse economic implications because it distorts people’s decision to buy and sell property, and it should have been removed when we introduced the GST over 20 years ago.”

But Oliver also said that offering the scheme would also have wider benefits to the market by encouraging empty nesters to sell their properties.

This would then create more housing supply for younger people with families who are looking to upsize.

Can’t we just get rid of stamp duty altogether?

Unlikely, because stamp duty brings in such a huge revenue for the NSW government and that money goes a long way to provide government funding for the state.

Stamp duty has earned NSW $9.379 billion for the 2020-21 financial year.

The forecast was $8.372 billion in the half-yearly review and that had been revised from the prior year's budget forecast of $7.9 billion.

It also means stamp duty is now the state's largest taxation revenue source, overtaking payroll tax.

This is the highest stamp duty revenue since the 2016-17 financial year, which was $9.67 billion when house prices were soaring.

In 2019-20, stamp duty revenue was $6.95 billion, while in 2018-19 it was $7.4 billion.

Taxes Calculation

A final word

First home buyers who want to get onto the property ladder quickly but are struggling to get together enough money to cover a deposit and also stamp duty could benefit from the government scheme and forego the lump sum payment.

However, buyers wanting to hold onto the property long-term could actually end up paying significantly more by opting for the more digestible annual tax.

At the same time, it's quite possible that measures to help housing affordability could even lift property values in the apartment market and outer, cheaper, suburbs with the twin stimuli for first home buyers of a shared equity scheme and the opportunity to pay an annual land tax instead of an upfront stamp duty.

So before making a choice between stamp duty or land tax, first home buyers should do their due diligence, crunch the numbers and speak to a professional about what might work best for them.

Because as is my motto with everything, ‘cheapest isn’t always best’.

About Kate Forbes is the National Director of Property Strategy at Metropole. She has 22 years of investment experience in financial markets on two continents, is qualified in multiple disciplines, and is also a Chartered Financial Analyst (CFA).
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