As part of its 2020-21 state budget, the NSW Government has announced that it is considering a wholesale reform of the transfer duty regime under which purchasers would be given the choice whether to pay an annual property tax instead of stamp duty on their acquisition of a property.
The NSW Government also announced further tax relief measures in response to the coronavirus pandemic.
Stamp duty and land tax reform
Stamp (transfer) duty is payable in NSW on a transfer or an agreement for the transfer of real property unless an exemption or concession applies.
To boost property ownership, household mobility and stimulate the NSW economy, the NSW Government proposes offering purchasers the choice between paying an upfront stamp duty amount and an annual land tax (where applicable), or an annual property tax (effectively a broad-based land tax that applies to all types of property).
How is the new system intended to work?
Purchasers would be given a choice on whether to opt-in to the system –that is, to pay the annual property tax instead of stamp duty and ordinary land tax, if applicable.
The annual property tax is expected to consist of a fixed amount plus a rate applied to the unimproved land value of an individual property, similar to the annual council rates.
Once a purchaser has opted into the new system, the property would remain subject to the system for all subsequent owners of the property. In other words, the opt-in would only occur once per property and subsequent owners would not be able to elect to pay stamp duty on their acquisition of the property instead of the annual property tax.
Currently, it is proposed that the new system would apply to all types of property, including residential (both principal place of residence and investment), primary production, and commercial properties. Owner-occupied residential properties and primary production properties would be subject to a lower annual property tax than residential investment properties, which in turn would be subject to a lower annual property tax than commercial properties.
As part of the reform, existing stamp duty exemptions and concessions for first home buyers could be replaced with a cash grant of up $25,000.
We note that the details of the new system have not been finalised. The above descriptions of the proposed system are based solely on the consultation document that has been released by the NSW Government and is therefore subject to change.
Who is the proposal expected to impact?
The proposed changes would impact all purchasers of NSW property. As noted above, the changes are expected to impact not only home buyers but also residential and commercial property investors.
Landowners who have already acquired property and paid stamp duty on that acquisition would not be impacted as the annual property tax would not apply to that property until it is sold, and a purchaser then opts into the new system.
The NSW Government is undertaking a public consultation process to shape the proposed reform.
It is currently inviting submissions on the proposed changes via email and via a feedback form on the NSW’s Have Your Say website by 15 March 2021.
The outcomes of the consultation process are expected to be reported by the NSW Government in mid-2021.
Pitcher Partners’ initial view of the proposed new system
If implemented, the proposed reform will be significant, with broad and long-term ramifications for home buyers as well as property investors and developers. Whilst on the face of it the proposal sounds promising as a means of reducing the existing barriers to home ownership and mobility of the workforce, it is too early to tell whether the positive aspects of the new system will outweigh the additional complexities it is likely to create for purchasers as well as the potential impact on the property market.
The proposed new system will certainly create more complexity at least for the period of transition between systems. Given the current estimate that it would take 20 years for 50% of all properties in NSW to become subject to the new system, the current stamp duty regime is still likely to be in place for quite some time. This means that there is likely to be two systems that need to operate in conjunction with each other for at least a few decades, with some properties being in the new system and others in the current system.
While the NSW Government is of the view that the proposed changes should place downward pressure on house prices over the longer term, that theory will need to be further explored as lower barriers to entry and the ‘buy now, pay later’ nature of the proposed annual property tax could ultimately place upward pressure on property prices.
Further, despite the NSW Government stating that the proposed property annual property tax is not a “tax grab” and revenue neutrality is one of the principles underlying the proposed reform, there is also a concern that the rate of the annual property tax could be increased over time, especially when the Government needs more tax revenue, therefore creating uncertainty over property owners’ ongoing costs under the new system.
Although they are only indicative rates, the rates of the annual property tax set out in the Government’s consultation document indicate that the new system may be primarily targeted towards (and benefit) home buyers, as opposed to other types of property purchasers. For example, take a commercial property in NSW that is acquired for a price of $5 million. Assume that the unimproved (or site) value of the property is $3.5 million. Based on the proposed rate of the annual property tax in the consultation document for commercial properties (2.6% of the unimproved value), the following comparison arises between the existing transfer duty and land tax regimes and the proposed new annual property tax –
|Stamp duty payable by the purchaser if they elect to pay duty||$260,005|
|Annual land tax payable (based on current rates and value at purchase date)||$44,356|
|Annual property tax payable if the purchaser opts into the new system||$91,000|
|Increase in annual tax amount payable on the property under new system||$46,644|
Based on the above figures and ignoring the time value of money considerations, if the purchaser of this commercial property intended to retain it for more than 5.5 years, they would likely elect to pay the upfront stamp duty amount as opposed to the annual property tax. After 5.5 years, they would effectively ‘break-even’ if they elected to pay stamp duty and land tax under the existing regime, whereas opting in to the new regime would increase their overall tax liability concerning the property if they retained it for a longer period.
There is a reasonable chance that some other states and territories may follow NSW in reforming their state tax regimes, particularly in respect of stamp duty. We note that the Victorian State Budget is due to be handed down on 24 November and we will be monitoring it closely for any state tax developments.
Further tax relief measures
The NSW Government has also announced the following further tax relief measures in response to the coronavirus pandemic.
Further land tax relief
The government has been providing 2020 land tax relief of up to 50% of the 2020 land tax liability for landlords of commercial and residential properties who provide rent relief to their tenants.
The Budget proposes further relief of up to 25% of the land tax for the 2021 year, but only for landlords of retail tenants who have an annual turnover of less than $5 million. If land tax relief has previously been granted in respect of that tenancy, the landlord will need to re-establish eligibility by demonstrating a 30% decline in the tenant’s turnover (15% for non-profits) for the quarter ended 31 December 2020.
The further land tax relief will be capped at the lower of 25% of the relevant property’s 2021 land tax and the amount of rent relief provided to the tenant between 1 January 2021 and 28 March 2021.
Payroll tax changes
The following payroll tax changes have also been introduced:
- A permanent increase to the payroll tax threshold in NSW from $1 million to $1.2 million effective from 1 July 2020; and
- A temporary reduction in the payroll tax rate from 5.45% to 4.85% for two years effective from 1 July 2020.
These changes apply to all businesses that have taxable wages in NSW. More specifically, these changes are aimed at eliminating a payroll tax obligation for approximately 3,500 small businesses in NSW that have annual taxable wages below the increased threshold of $1.2 million.
The retrospective application of these measures should see employers receiving payroll tax refunds when their 2021 annual payroll tax reconciliations are lodged. The NSW Government estimates that these measures should save businesses approximately $2.4 billion for the next two financial years.
This change is positive news for NSW businesses. These businesses will now be able to enjoy one of the lower payroll tax rates and one of the highest payroll tax-free thresholds in Australia. For example, for the financial year ended 30 June 2021, a business that pays annual taxable wages of $2,000,000 will benefit from a $15,700 reduction in payroll tax.
Other tax relief measures introduced by the NSW Government in the 2020 calendar year, which will be extended into the 2021 year include:
- Land tax concession of up to 50% for new build-to-rent developments that commenced construction on or after 1 July 2020. To qualify for the concession (which will apply until 2040), the build-to-rent property must meet several eligibility criteria, including that the property is managed under unified ownership and must not be sub-divided within the first 15 years. Eligible build-to-rent properties are also exempt from foreign investor duty and land tax surcharges.
- First home buyers will pay no transfer duty when they purchase a new home valued up to $800,000 or vacant land up to $400,000, and a concessional rate of duty when purchasing a new home valued at between $800,001 and $1 million, or land valued between $400,001 and $500,000. These concessions are in place until 31 July 2021.
Contact your Pitcher Partners representative if you have any queries concerning the NSW Budget 2020-21 measures.