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Opting to pay an annual tax rather than stamp duty is “a double-edged sword” and could even raise house prices.
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Accountants urge home buyers to weigh cost of dodging stamp duty
17 January 2023
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11 minute read
Accountants are warning home buyers to weigh up the costs of switching to the NSW government’s alternative land tax regime with 2,500 applications for stamp duty refunds expected as the reform commenced.
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The scheme, First Home Buyer Choice, began on Monday and allows first-home buyers purchasing properties for up to $1.5 million to pay an annual property tax instead of transfer duty (stamp duty).
BDO tax partner Fady Abi Abdallah said avoiding stamp duty made purchasing a first home cheaper but it could have the effect of increasing house prices.
“The option to pay a smaller amount annually will certainly assist first home buyers in entering the property market but it’s also likely to stimulate demand in the short term which might put pressure on house prices,” Mr Abi Abdallah said.
“It’s a bit of a double-edged sword as any upfront duty savings are likely to be offset by increased purchase prices.”
“The market is likely to quickly adjust to reflect the increased purchasing power of first home buyers.”
CPA Australia’s senior manager of tax policy, Elinor Kasapidis, agreed that dodging stamp duty could put additional pressure on prices.
“Removing the need to save for stamp duty upfront means some first-home buyers may be able to purchase sooner,” said Ms Kasapidis.
“Some people who have already saved up for stamp duty may use these funds to pay more for a home, which could then put pressure on housing prices, but we note the NSW property tax option is only available for a limited group of buyers.”
But Ms Kasapidis said it was encouraging to see the NSW government moving away from stamp duty.
“CPA Australia wants governments to move away from inefficient taxes like stamp duty. There is widespread agreement among tax experts and professionals that stamp duty should be replaced with a smaller, annual fee for all home buyers,” she said.
“CPA Australia has been encouraging federal, state and territory governments to discuss stamp duty, GST, and payroll tax reform. The time is overdue for governments to come together on these issues and pursue meaningful tax reform.”
However, both Mr Abi Abdallah and Ms Kasapidis warned first-home buyers against rushing to opt for the new property tax because it could end up costing more.
“First-home buyers who choose the annual land tax option will also need to map out how long they intend to hold the property as there will be a point when paying stamp duty upfront will cost less than an annual land tax over the ownership period,” said Mr Abi Abdallah.
“The key is to work out the break-even point before making a decision.”
“Prospective buyers should also be aware that the land tax rate will edge higher each year as the value of their property increases so they will need to factor that into their budget.”
Ms Kasapidis urged those eligible for the property tax to understand the long-term costs of paying annually.
“First-home buyers must decide whether to choose stamp duty or property tax with their eyes wide open,” she said.
“Those who stay in their home for a long period of time may end up paying more in property taxes than they have been charged in stamp duty.”
“There are many incentives and proposals at different levels of government to help first-home buyers get onto the property ladder. It can be challenging to navigate different options available. First-home buyers who are unsure about what approach to take should seek advice.”
NSW Treasurer Matt Kean said there was strong interest in the property tax option with more than 56,000 calculations made online comparing it to the cost of stamp duty.
He said those eligible who had purchased their first home late last year could also swap over and receive a refund on their stamp duty.
“The new choice is empowering first home buyers to get a foot on the property ladder,” he said.
“Eligible first home buyers can now opt out of stamp duty in favour of a smaller annual fee while those who have bought since 11 November 2022 can get a refund of stamp duty within 10 business days and pay the annual fee instead.”
The government said annual property tax rates would be indexed each year as of July 2024, with the current costings set at:
- Residential land that is owner-occupied - $400 + 0.3 per cent of land value.
- Residential land that is not owner-occupied - $1,500 + 1.1 per cent of land value.
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