THE NSW government has proposed a once in a generation tax reform to replace the 155-year old stamp duty and land tax with an annual property tax, in a move that will inject $11 billion over four years into the economy.
In the 2020-21 budget, NSW Treasurer Dominic Perrottet labelled stamp duty “a relic”, saying it is one of the biggest financial barriers to home ownership and land tax places a large tax burden on a small number of taxpayers.
Stamp duty was introduced in 1865 and while rates have been largely unchanged in recent decades, in practice the amount homebuyers pay has grown dramatically faster than home prices or incomes.
Over the last 24 years, home ownership rates in NSW have fallen by 6% and the rate amongst people aged 35-44 decreased by 14%, according to the government data.
“Stamp duty is a relic from a bygone era when you picked one career, started a family, bought a home and basically settled in for life. It adds tens of thousands of dollars to the cost of the biggest financial commitment most people ever make,” Perrottet said.
Stamp duty adds around $34,000 in upfront costs to an average homebuyer. The treasurer said by removing the upfront cost, it will make it easier for first home buyers, families looking to upgrade and others looking to change their property to save what is needed to purchase their next home.
If implemented, as part of the transition to phase out the old system, homebuyers can choose between paying stamp duty upfront or paying a much smaller annual property tax. Price thresholds would limit the number of properties initially eligible for transition while ensuring over 80% of residential properties are eligible to opt-in from day one.
The new annual property tax would consist of a fixed amount plus a rate applied to the unimproved land value of an individual property, and not aggregate landholdings. This is broadly in line with the approach to council rates.
The treasurer the proposed changes could inject $11 billion over four years into the economy providing much needed stimulus in the current COVID-19 induced downturn. The budget forecast a deficit of $16 billion for 2020-21 and revenue is expected to be down by $25 billion over five years. Net debt is tipped to peak at $104 billion at June 2024.
Australian Property Institute CEO Amelia Hodge said the long overdue economic reform and focus on stimulus and tax cuts for businesses is welcomed, adding that the effects of coronavirus are still being felt on business activity, particularly across the property sector.
“While NSW residents will first have their say on the proposal, we believe removing stamp duty – a barrier to first home buyers, those looking to upgrade a family home, or downsize in retirement – is a positive move for homeowners and the economy.
“Reforms to stimulate activity in the property sector are very much welcomed. With property being the largest asset class in New South Wales, the work of our property professionals will be essential to our COVID recovery,” Hodge added.
“Consumer confidence, building activity and support for job security will help property transactions continue. This is supported by the budget’s payroll tax cuts and stimulus for residents.
“At a time when Australians are facing so many uncertainties, the objective advice of property professionals will be needed as families and small businesses consider their financial position. This might include refinancing or selling the family home, farm or a small business shopfront. It appears in opening a consultation around tax reform, the NSW government has indicated its support to the sector.” Hodge said.
The Urban Development Institute of Australia NSW CEO Steve Mann cautiously welcomed the proposal and said the government must learn lessons from other jurisdictions.
“We want to avoid the failures of the ACT to effectively transition away from stamp duty, and look to more positive models, such as payment of stamp duty on improved land value at time of purchase,” Mann said.
“Historically, UDIA NSW has been largely supportive of the transition from stamp duty to a broad-based land tax, however this proposal could have an extremely difficult transition period, and NSW government must work quickly to solidify the reform now that it has been announced.
“The deepest concern for industry is moving through this transition period – with an exceptionally long consultation process – which could see potential homebuyers holding off on their purchase until changes are introduced,” he added.
“With reforms slated for late 2021, homebuyers could hold off on purchasing until they have more certainty, which could effectively stall the industry completely.” Mann said.
Urban Taskforce CEO Tom Forrest said stamp duty was a highly inefficient tax as it distorts behaviour and reduces productivity across the economy.
“The treasurer deserves great credit for taking on this long vexed yet universally acknowledged contagion on the tax system. Reform of stamp duty will make home ownership easier for young families and all new home buyers. It will remove the disincentive on moving for those who seek to down-size,” Forrest said.
He added that the budget papers also acknowledge the need for a less prescriptive planning system with the announcement of plans to simplify and consolidate employment zones.
“This will create greater flexibility and allow businesses to change and adapt to changes in demand. This is particularly important in this fast changing COVID-19 world.” Forrest said.
The Real Estate Institute of NSW CEO Tim McKibbin said stamp duty has placed a disproportionate amount of the state’s tax burden on homebuyers.
“It’s not widely known that the government collected $1,857,906,662 in stamp duty revenue in the three months to 30 September 2020, which is $235,300,000 more than for the same period last year,” McKibbin said.
“Stamp duty is an inefficient, inequitable tax that distorts market activity. Not only does it discourage people from moving, especially downsizers who would otherwise free up housing stock, it also limits the additional expenditure home buyers could otherwise engage in.
“The property industry, including property consumers, carries a disproportionate amount of the state’s tax burden. It should be more equitably spread across all industries,” McKibbin said.
Property Council of Australia NSW executive director Jane Fitzgerald said phasing out stamp duty is the good of the wider economy, and the NSW’s proposed reform model has many strengths and avoids mistakes of other jurisdictions.
“There is no doubt that this year has been one of the most challenging on a number of fronts, for the property industry, for the community and for all businesses. Treasurer Perrottet’s budget delivers on the government’s commitment to provide targeted stimulus measures to fast track infrastructure projects and increase jobs to support the economic recovery of the state.
The PCA also welcomed the $27 million investment over four years for the Office of the Building Commissioner.
“We know that building quality is a critical issue for the industry and the community so further investment to support construction and an increase in the number of dedicated compliance officers to focus on residential apartment buildings is a positive step.
“Providing a clear and credible plan to deal with the issue of flammable cladding on multiunit residential properties is also welcomed with the introduction of ‘Project Remediate’ and no additional levies being introduced, will give the property industry and owners further confidence and certainty.” Fitzgerald said.