Proposed NSW Tax Reform

November, 2020

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The Announcement

m3property in its September 2020 report “Broad-Based Land Tax Could Replace Stamp Duty” foreshadowed the New South Wales Government’s intention to abolish stamp duty and replace it with a broad-based land tax.

The announcement by the government on November 17 brought this closer to reality. The current system of both land tax and stamp duty, as shown in the paper mentioned above has been subject to volatility relating to market activity and value swings, based on sentiment. A new simpler, fairer and less volatile source of government tax revenue is considered an optimal outcome.

The Proposal

  • The New South Wales Budget for 2020-21 has opened up the prospect of major tax reform in the State. The Budget proposes replacing stamp duty and land tax with a single property tax on an opt-in basis for future property purchases. According to the NSW Treasury, this could inject $11 billion into the NSW economy in the first four years. The changes could, however, impact the value of properties depending on whether the option to take the property tax or existing taxes are selected.
  • According to the government, the purchasers will be able to opt-in to the new reforms by paying an annual property tax or paying stamp duty initially and land tax (where applicable) annually. Price thresholds are expected to initially exclude people purchasing more expensive properties from choosing the property tax. Over the longer-term, it is expected that the property tax would replace stamp duty and land tax.
  • The new tax would remove one of the largest financial barriers to entering the property market, given that based on the Domain September median house price of $1,154,406 a purchaser would need to find $48,497.33 upfront for stamp duty along with their deposit.

Our Assessment

The proposed opt-in property tax system effectively creates an additional tax (at least in the short- to medium-term) increasing the administrative burden and making the system more complex.

Understandably, double taxing of people who have already paid stamp duty would be unfair, so the new system would only come into effect when a property is purchased.

Land values while generally following market conditions are also influenced by supply and demand. With population growth forecast to continue, land in NSW will become scarcer and, therefore, is likely to rise in value.

Table comparing Stamp Duty and Land Tax to proposed Property Tax

Authors

James Ruben

Director

View Profile > NSW

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Residential Property

  • Historically, first home buyers have been significantly constrained by this upfront payment. Currently, first home buyers are eligible for stamp duty exemptions for properties valued up to $650,000 and concessions for properties valued at less than $850,000. If the proposed reforms are implemented, a grant of up to $25,000 would instead be provided to first time purchasers.
  • In terms of the residential market, the changes while having the potential to bring entrants into the market forward, may
    result in a larger tax burden longer-term, particularly if the person is looking to stay in the home long-term.
  • The impact on potential purchasers is going to depend on the option taken by a buyer at purchase of a property, the property’s sale price, how long the person intends to stay at the property and the property’s land value both now and in the future.

Potential Impacts of Implementing the New Property Tax – Residential Property

Potential impacts of implementing the new property tax on the residential market

Commercial Property

  • Two types of buyers purchase commercial properties – owner-occupiers who operate a business from the premises and investors. The impacts will be different.
  • The burden on Commercial owner-occupier operators appears to be higher for the proposed property tax with the current rate asked for land tax being significantly lower.
  • While stamp duty also needs to be taken into consideration, this is a one-off payment. Therefore, the comparison of the tax burden depends on the length of time a business stays in one location. Business operators who purchase property generally stay in these premises over a long time-frame (10-20 years). Goodwill is built up in a site, relating to convenience of customers/clients or the existence, or lack thereof, of competitors.
  • For investors who tend to buy and sell more often, the choice of which tax route to take is more complicated and is going to depend on investment intentions.
  • The impact on potential purchases is going to depend on the option taken by a buyer at purchase of a property, the property’s sale price, how long the entity intends to owner occupy or invest in the property and the property’s land value both now and in the future.

Hypothetical Case Study

Noting: Stamp Duty is on market value and Land Tax and the new Property Tax is on land value. We have, therefore, made assumptions about both.

Hypothetical case study comparing the current system and proposed system

Table Assumptions: The property is a single holding, and not owned by a foreign entity. Growth in the land tax and the new property tax assumed to be 3% per annum.

After ten years, all of the above scenarios are advantaged by the old system. When looking at a five-year investment horizon, the business is better to go with the new property tax system. The average length of property ownership in NSW is expected to be greater than ten years for commercial properties indicating that commercial purchasers are likely to be disadvantaged by opting into the new property tax. Investment time frame intentions are going to be a crucial decision before investment under the proposed tax changes.

 

Taxes need to be fair, simple and provide a stable source of government revenue.

Potential Impacts of Implementing the New Property Tax – Commercial Property

Potential impacts of implementing the new property tax on the commercial market

Observations

  • At m3property we agree change is required to make the NSW tax system fairer, simpler and less volatile and a broad-based property tax is a good option to achieve this.
  • The devil is in the detail, however, and it is yet to be seen whether an opt-in system is likely to achieve the outcome of simplicity and it could result in a continuation of the current revenue volatility.
  • Having three taxes with an opt-in nature may also result in increased administration costs, and conflict as property owners navigate what rates apply to what uses.