Property tax and GST: changing tax policy in NSW

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With a change in the leadership of the NSW state government, now is an ideal time to examine the government’s plans and views towards the future of the tax system. Will the government’s key policies and statements lead us to a future tax system that is simple, efficient and equitable?

The key policy you might be wondering about is the NSW Government’s plan to replace stamp duty on property transactions and land tax with an annual property tax. We welcome this move as it looks to replace an archaic and antiquated tax (stamp duty) with one that is more efficient and reduces access and mobility barriers for families. The idea that GST may play a larger role in Australia’s tax revenue is also an important one at the moment.

NSW’s annual property tax

In late 2020, and in the 2021-22 Budget, the NSW Government proposed reforms to the state’s tax system to allow property buyers to choose between paying stamp duty and land tax when purchasing a property or opting to pay an annual property tax instead. Broadly, the annual property tax will:1

  • Apply to the unimproved land value of the property, compared to the higher valued standard of ‘improved land value’ that stamp duty and land tax apply to;
  • Works by allowing purchasers to make a permanent election to opt-in a property (i.e. it can’t be reversed by subsequent purchasers);
  • Provide protection for tenants against rent increases due to the annual property tax;
  • Feature hardship schemes to provide assistance to taxpayers in need;
  • Set thresholds to minimise the fiscal impact of the election which would still allow over 80% of properties to be eligible for the annual property tax; and
  • Not affect properties that aren’t bought or sold.

The Government has proposed the following rates which vary depending on a range of factors, such as whether the property is commercial, farmland, or owned as an investment.2 It should be noted that these rates and thresholds may still be subject to change.

Property Class

Fixed Fee

Annual Ad Valorem rate (based on unimproved value)

Residential – owner-occupied

$400

0.3%

Residential – investor-owned

$1500

1.1%

Farmland

$0

0.3%

Commercial

$0

2.6%

Property tax surcharge on aggregate landholdings above $1.5 million of unimproved land (excluding principal place of residence and farmland)

 

0.3%

 

The problem with stamp duty

Stamp duties are an inefficient and inequitable tax. Why?

  • It discourages the transfer of assets and homes, inhibiting families from upsizing or downsizing to better suit their circumstances.
  • The restriction on mobility can have significant flow-on effects including the creation of significant barriers to workplace mobility. People are potentially deterred from taking on new job opportunities that would require them to move, given the significant extra costs.
  • Barriers are created for first home buyers, who need to budget for a significant extra cost when looking for their property.

The rapidly rising prices in NSW, especially Sydney, over the past two decades have steadily compounded all these problems.

Further, stamp duty is an archaic tax originally created to cover the fees of validating contracts and probates. It’s justification in a modern world is questionable at best. Stamp duties have mostly likely been retained as they are a primary source of revenue for State Governments. Despite this, revenue from stamp duty can be highly volatile and subject to a number of external forces including the underlying property values and number of transactions. This kind of irregular revenue can make it difficult for governments to better plan for services that meets the community’s needs.

The economic & lifestyle benefits of an annual property tax

The benefits of an annual property tax have been extensively noted in a range of studies and reports.3 An annual property tax addresses the issues with stamp duty noted above.

The mobility and cost barriers for purchasers, especially families and first home buyers, are notably minimised. People are not disincentivised to move due to the extra cost of stamp duty. Instead, the decision can be made based on their personal circumstances at that time (e.g. employment opportunities, effect of move on children, social preferences etc.).

Meanwhile first home buyers do not have to save an extra significant amount to pay as a lump sum, and can continue to more freely move in the future. An annual land tax allows people to enter the property market, downsize or upsize their home or relocate as they see fit, without the burden of large, lump sum tax payments.

An annual property tax is also a more stable source of income for governments, allowing them to more accurately forecast revenue and expenses. This in turn will allow governments the opportunity to better plan their services and costs.

The costs of the NSW annual property tax vs stamp duty

At first instance, a yearly tax may seem like an increased burden on the yearly budgets of families. However, this view ignores the significant financial impact of Stamp Duty. Below are three simple examples which attempt to demonstrate the true difference in cost.4

Example 1 – A medium sized house in Sydney’s western suburbs

A single story home in Mount Druitt situated on a block of land around 500sqm can sell for $650,000 or more. Stamp duty on a property sold for $650,000 is approx. $24,457. Meanwhile, annual property tax would cost the owners around $1,300 per year.5 That’s 18 years of paying the annual property tax before the cost of the land tax is greater than the cost of stamp duty.

Example 2 – Large home on a large block of Land in Sydney’s north-west

A large double story house on a block of land around 700sqm in Kellyville/Castle Hill/Bella Vista costs approx. $2.5 million. Stamp duty on this transaction will cost $122,067. Meanwhile, the annual property tax will cost the owners around $3,400 per year.6 That’s almost 36 years of paying annual land tax before the cost of land tax is greater than the cost of stamp duty.

Example 3 – An apartment in Sydney’s inner suburbs

A two bedroom apartment in Wolli Creek sells for approx. $730,000. Stamp duty on this sale will cost $28,057. Meanwhile, the annual property tax will cost the owners around $730 per year.7 That’s almost 39 years of paying annual land tax before the cost of land tax is greater than the cost of stamp duty.

For all the examples above it should be noted that, in Australia, the average duration a property owner holds a property is 10.6 years for homes and 9.5 years for apartments.8 This is longer than it was a decade ago and coincides with a rapid period of property prices rising (which in turn has noticeably raised the cost of stamp duty).9

It should also be noted that the NSW annual property tax has adopted an opt-in approach. Families who do not elect to opt-in, or those who do not purchase a property that has opted-in, will not have to pay the annual land tax. Further, since the annual tax only comes into effect when a property is bought or sold, people who stay in their existing homes and don’t buy or sell will not be impacted.

Still work to be done

There are still details about the annual property tax that are yet to be announced. The main piece of missing information is any form of indicative figures regarding the thresholds for opting into the annual land tax. Without these indicative figures, taxpayers may not have enough time to factor this into their next property purchase. Further, the indicative thresholds are needed to test the government’s claims that the property tax will be available for 80% of all residential property.

The annual land tax also has some features that may require reconsideration. These include:

  • the rates used for the purposes of indexation;
  • ensuring there is an adequate lead time before the measure is introduced;
  • clarifying any retrospective application issues for those who opt-in before the measure takes effect.

Finally, further clarification on the hardship and dispute resolution processes, to ensure the system operates fairly from a procedural standpoint point. Without this, there is a risk of taxpayers being unable to resolve inequitable decisions relating to the annual property tax.

You can read The Tax Institute’s Submission to the NSW government which highlights some of the outstanding issues in greater detail.

The role of GST in Australia’s Future

There have been suggestions that the incoming government has previously made comments favouring an increase in the rate of GST. Leaving aside discussions about the ideal allocation of GST amongst the states, this is a good opportunity to critically examine the factors that will ensure that GST shapes Australia’s future tax system in a simple, efficient and equitable manner.

The Tax Institute supports a considered approach to re-balancing Australia’s tax revenue. GST is a more efficient tax which provides governments a more stable source of revenue, even during times of economic shocks. This is largely why most OECD jurisdictions have a higher reliance on GST equivalent taxes (such as VAT) to support their economies. In fact, Australia’s reliance on GST is one of the lowest compared amongst OECD nations.

Australia has a disproportionate reliance on individual and company income taxes. In 2020-21, 49.6% of all tax receipts were from personal income tax on individuals.10 Further, as Australia ages, spending on GST-free goods and services (such as health care) will increase whilst the revenue collected from GST will decrease. With Australia’s ageing population and upcoming increased costs on healthcare and aged care, it needs to be questioned whether income taxes alone can support Australia’s upcoming needs, especially given the devastating impact of recent bushfires, floods and COVID-19.

Broadening the GST base (by removing the existing exemption to GST) will take large steps in removing most of the underlying complexity and compliance costs with GST whilst providing a larger source of revenue for government to meet Australia’s needs. Another alternative is to increase the existing GST rate which, unless the existing exemptions are also removed, will likely increase the pressures on the existing complexities and compliance burden.

It is important to note that major reform to GST need to be a part of a larger plan to fundamentally improve Australia’s tax system. Increasing GST can disproportionately impact certain sectors of society, particularly low and middle income earners. As a result, any changes to GST should recognise this burden and provide the necessary relief. The relief can either be through a reduction in income tax rates for low and middle income earners or increased support for them through the transfer system.

Interested in reading more about changes to our tax system and how we can build equitable, fair and efficient tax policy? Check out chapter 12 of our Case for Change.

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Footnotes

1 For a comprehensive summary of the features see Matthew Sealey, FTI, and Si Wei Jiang, ‘Alternative Assests Insights: NSW property tax reforms update’ https://www.taxinstitute.com.au/titaxinaustralia/alternative-assets-insights-nsw-property-tax-reforms-update

2 NSW Property Tax Progress Paper, June 2021, https://www.nsw.gov.au/sites/default/files/2021-06/property-tax-progress-paper-june-2021.pdf, page 25.

3 For a full list of reports, see NSW Property Tax Progress Paper, June 2021, https://www.nsw.gov.au/sites/default/files/2021-06/property-tax-progress-paper-june-2021.pdf, page 13.

4 The house prices in the examples below are taken from recently sold pries listed on real estate website. They are intended to be ballpark figures. Stamp duty costs have been calculated using the NSW Revenue stamp duty calculator. Annual property tax has been calculated using the figures in the table above. All examples assume the property is purchased by an owner-occupier. All unimproved values have been taken from the Valuer general’s office for similar sized and located properties. Indexation of annual property tax has not been factored in.

5 This is calculated as the $400 annual fee plus a rate of $900. The rate is based on the unimproved value of similar sized land in this region being $300,000.

6 This is calculated as the $400 annual fee plus a rate of $3,000. The rate is based on the approximate unimproved value of the land in this area of this size being $1 million.

7 This is calculated as the $400 annual fee plus a rate of $330. The rate is based on the approximate unimproved value of the land in this area of this size being $110,000.

8 Stephanie Maclean, ‘Why Aussie homeowners are holding property longer than a decade ago’, https://www.realestate.com.au/news/why-aussie-home-owners-are-holding-property-longer-than-a-decade-ago/ (18 Nov 2020).

9 Stephanie Maclean, ‘Why Aussie homeowners are holding property longer than a decade ago’, https://www.realestate.com.au/news/why-aussie-home-owners-are-holding-property-longer-than-a-decade-ago/ (18 Nov 2020).

10 Intergenerational Report 2021, page 135

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