On 21 June 2022 the New South Wales and Queensland Governments handed down their respective State Budgets for 2022-23.
The NSW State Budget includes a number of revenue measures, which include the introduction of an annual property tax option for first home buyers, and an increase in annual land tax for foreign owners.
The Queensland State Budget includes several payroll tax measures, including a new payroll tax mental health levy for large employers, and payroll tax relief for small and medium businesses. These changes are reflected in a new Revenue Legislation Amendment Bill 2022 (Qld) introduced into the Queensland Parliament on the same day.
What are the key updates?
- NSW: Annual property tax option for first home buyers
The NSW Government has announced that eligible first home buyers purchasing properties valued up to $1.5 million will have an option to pay an annual property tax (Annual Property Tax) instead of stamp duty. The Annual Property Tax is designed to make it easier for first home buyers to purchase a home by reducing the upfront cost that needs to be financed. However, some buyers are likely to pay more tax in the long run if they choose to pay the Annual Property Tax instead of stamp duty.
What are the key eligibility requirements?
To be eligible for the Annual Property Tax, all of the following requirements must be satisfied:
- The buyer must be an individual, and not a company or a trust.
- The buyer must be over 18 years old.
- The buyer, or at least one person if the property is purchased with other persons, must be an Australian citizen or permanent resident.
- The buyer and his/her spouse must not have previously owned or co-owned residential property in Australia, or received a first home buyer grant or duty concession.
- The property must be worth less than or equal to $1.5 million.
- The buyer must move into the property within 12 months of purchasing it and live in it continuously for at least 6 months.
- The buyer must sign the contract of sale on or after the scheme commencement date.
If a buyer satisfies the above requirements, they will be eligible to choose between paying the usual amount of stamp duty up front, or paying the Annual Property Tax.
How is the Annual Property Tax calculated and assessed?
The Annual Property Tax will be calculated based on the unimproved land value of the purchased property.
The Annual Property Tax rate is set at $400 plus 0.3% of the property’s unimproved land value in 2022-23 if the buyer remains an owner-occupier. If the buyer decides to move out of the property, this will change the status of the property to an investment property, in which case the Annual Property Tax rate for investment properties will apply. The Annual Property Tax rate for investment properties is $1,500 plus 1.1% of the property’s unimproved value in 2022-23.
If a buyer moves back into the property, they can then claim the lower Annual Property Tax rate for owner-occupiers once again.
The tax rates will be indexed each year based on the gross state product per capita, to ensure that the tax payments grow in line with average incomes rather than land values.
The Annual Property Tax assessments will be issued in respect of financial years. A pro rata adjustment will be made based on the number of days in the year a property is owned for properties that are owned for less than a full financial year.
Should an eligible buyer opt into the Annual Property Tax?
All existing first home buyer stamp duty exemptions/concessions will continue to apply.
If the property being purchased costs less than $650,000, it will be fully exempt from stamp duty if the requirements of the first home buyer stamp duty exemption are satisfied. Should this be the case, there will be no advantage to be gained by opting into the Annual Property Tax.
If the property being purchased costs between $650,000 and $800,000, concessional stamp duty rates may apply. In this situation, a comparative calculation exercise will need to be undertaken and the buyer will need to decide whether it is worthwhile opting into the Annual Property Tax or simply paying the upfront stamp duty.
If an eligible buyer opts into the Annual Property Tax, they will continue to pay that tax for as long as they own the property. However, the property will not be locked into the Annual Property Tax regime when its ownership changes. A subsequent buyer of the property will still need to pay stamp duty on their acquisition, unless they are also an eligible first home buyer, in which case they will also be able to opt into the Annual Property Tax.
When does the Annual Property Tax start?
Eligible buyers who enter into a contract of sale on or after 16 January 2023 will be eligible to opt into the new Annual Property Tax.
Eligible buyers who enter into a contract of sale between the enactment of the relevant legislation and 15 January 2023 can also opt into the new Annual Property Tax. However, those buyers will be required to pay any applicable stamp duty within the normal timeframe and will then be able to apply for a refund of that duty from 16 January 2023.
To illustrate the application of the new Annual Property Tax, we set out the following example:
Tom enters into a contract on 31 March 2023 to purchase a NSW home worth $1 million, which settles on 31 May 2023. He is 25 years old, is an Australian citizen and has never owned residential property in Australia. He moves into the property shortly after settlement to occupy it as his home for the foreseeable future. The unimproved land value of Tom’s property is $300,000.
In these circumstances, Tom would have a choice to either pay stamp duty on the acquisition, or to opt into the new Annual Property Tax. If Tom opts into the new Annual Property Tax, he will receive an Annual Property Tax assessment for the 2022-23 financial year calculated at the rate of $400 plus 0.3% of the unimproved land value in 2022-23, with a pro rata adjustment for the number of days he owns the property for the 2022-23 year, as follows:
[$400 + (0.3% x $300,000)] x (31 days / 365 days) = $110.41
Tom will continue to pay Annual Property Tax for as long as he owns the property. The rate of Annual Property Tax moving forward will depend on the yearly indexation and whether Tom continues to live on the property. By way of comparison, the upfront stamp duty payable by Tom would be $40,305. Ignoring any increase in the annual tax through indexation which will only be known over time, the stamp duty cost equates to 31 years of Annual Property Tax if Tom continues to live in the property, but only 8 years of Annual Property Tax if Tom turns it into an investment property after living in it for the first 12 months. Accordingly, it will be important for a first home buyer who is considering opting into the Annual Property Tax to think about whether they intend to reside in the property for a long time, or whether they are more likely to move on to another property as soon as they are able to and potentially retain the first property as an investment.
Current status of Annual Property Tax
The legislation to give effect to the Annual Property Tax has not yet been introduced into Parliament. The NSW Government intends to introduce the legislation in the second half of 2022. Further details on the new tax will be available once the legislation is introduced.
- NSW: Increase to surcharge land tax for foreign persons
Foreign owners of residential property in NSW are subject to an additional surcharge land tax on top of the general land tax payable on the land. The NSW Government introduced the State Revenue Legislation Amendment Bill 2022 (NSW) on 21 June 2022, which doubles the foreign owner surcharge land tax rate from 2% to 4% from the 2023 land tax year. The effect of this is that residential land owned by foreign owners will be subject to a higher land tax rate moving forward.
Under the current rules a discretionary trust is deemed to be a foreign trust for NSW land tax purposes unless the terms of the trust deed expressly provide that:
- no foreign person can be a potential beneficiary of the trust; and
- the terms of the trust cannot be amended in future to allow a foreign person to become a potential beneficiary of the trust.
In other words, if the terms of the trust allow the trustee to distribute income or capital of the trust to any potential foreign persons (even if the foreign persons are not specifically named as a beneficiary), that discretionary trust will be treated as a foreign trust for NSW land tax purposes. Most standard trust deeds do not include the required restrictions to ensure that the trust is not a foreign trust for NSW land tax purposes and the deeds need to be specifically drafted or amended to include the required exclusion clauses.
As such, we recommend that existing and proposed owners of residential property in NSW review their trust deeds to ensure that their NSW properties will not be captured by the surcharge land tax.
- Queensland: Payroll tax updates
Similar to recent Victoria’s implementation of a mental health and wellbeing levy, Queensland has announced that from 1 January 2023, a mental health levy will apply to large employers (or groups of employers) which pay Australia-wide wages in excess of $10 million annually. Specifically, a 0.25% levy will be charged on Australian taxable wages in excess of $10 million, plus an additional 0.5% on Australian taxable wages in excess of $100 million. It is anticipated the mental health levy will bring $1.64 billion into the State budget over five years and it is designed to maintain and improve Queensland’s mental health system.
Additionally, in Queensland, for payroll tax liabilities arising on or after 1 January 2023, the payroll tax deduction will be extended from the current ceiling of $6.5 million in annual Australian taxable wages up to $10.4 million. This reflects an increase in the phase out rate of the deduction from $1 for every $4 to a rate of $1 for every $7 of taxable wages above the $1.3 million threshold. It is expected that the extended payroll tax deduction will provide benefits of up to $26,000 per year for more than 12,000 Queensland businesses and will cost the Government $210 million over the next four years. In NSW, a subprogram of the Future Economy Fund will offer payroll tax exemptions to encourage businesses of future industries to establish or expand within the State. Payroll tax exemptions arising from the subprogram are estimated to reduce NSW State Government revenue by $51 million over the five years to 2026-27.
- Queensland: Other changes
The Revenue Legislation Amendment Bill 2022 (Qld) (the Bill), introduced on Tuesday, also contains proposed changes to land tax and stamp duty.
Whilst not strictly a feature in the 2022-23 Queensland state budget, the Bill includes a significant land tax reform previously announced in the 2021-22 Budget Update – Mid-Year Fiscal and Economic Review. The proposed amendment enables the value of interstate landholdings to be taken into account when assessing land tax payable in Queensland. This is likely to result in more land tax being payable in Queensland by taxpayers who own properties in multiple states, due to their applicable tax rate being determined based on the value of their Australia-wide landholdings.
We will review the Bill and provide more details in due course.