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NSW State Budget: Home buyers choice

NSW State Budget: Home buyers choice

The NSW State Government proposal to give home buyers a choice between paying up front Stamp Duty or an Annual Property Tax (APT) is seductively simple yet potentially punishing. There are (at least) three aspects of the proposed APT that don’t sit well.

First, the average punter trying to enter the home property market will likely fall for the seduction of paying a significantly smaller upfront APT compared to the alternative significantly larger Stamp Duty. However, the payment of Stamp Duty is a ‘one-off’ burden, the pain of which subsides overtime. On the other hand, the APT is forever; year in year out until the property is sold by the current owner, a pain which is relived each year (on top of Council rates).  It’s the ‘forever’ aspect that punters will miss with the APT. APT is the State Government’s gift that keeps on giving, irrespective of the property cycle.

Secondly, the choice is not really a ‘true’ choice. A ‘choice’ suggests that each time you purchase a property, you are given a choice to select between paying upfront Stamp Duty or the APT. This is not the case. Under the proposal, once a property is subject to the APT, subsequent owners must pay the APT. That is, you cannot choose between paying Stamp Duty and the APT on a property that has already been subject to APT. Now that’s not real ‘choice’.

Third, APT may be unfair for freehold property owners. Under the proposal, owner-occupied residential property would potentially attract an APT of $500 + 0.3% of the unimproved value. It is generally accepted the unimproved land value for a unit is less than that of a freehold property; yet their market values may be the same. This would result in a freehold property owner paying more APT than a person who owns a unit with the same market value.  What distortions will this create in property construction, more units?

Below is an example based on real data.

Paying Stamp Duty
Purchase price unit in Blacktown $380,000
Duty payable $12,435
Paying annual Property Tax
Land tax value of the unit $183,600 x 0.3% + $500 = $1,051
Breakeven 12,435/$1,051 12 years

Therefore if a young couple’s intention is to live in their home for more than 12years, they are better off paying stamp duty  If intention is to leave before 12years (say because of children), then better to pay the APT.  Of course, the land tax values will likely increase within a 12-year period, but this will also means the breakeven period will be shortened making the choice to pay upfront Stamp Duty more attractive.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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