Will the reforms make it easier to jump on the property ladder?
After the economic struggle of 2020, it is fair to say that more than ever, we are all on the lookout for tax reforms, and their potential implications on both individuals and the economy.
The NSW Government’s budget, released in November 2020, includes the proposal to give land buyers the option of either paying stamp duty or paying a new annual property tax. Essentially, this proposed change allows buyers to choose between an upfront transaction cost or an increase to the ongoing annual cost of holding a property.
The aim of the reform is to stimulate the economy by reducing the upfront financial burden stamp duty can place on buyers. Treasury Consultation paper Buying In NSW, Building a Future provides examples of tax reviews which all suggest stamp duty is a significant barrier to purchase.
The paper also highlights that the increase to duty paid on property purchases has exceeded the increase in both average house prices and average wages in recent years.
Once introduced, in most cases, buyers would have the choice of paying stamp duty or property tax and buyers would need to evaluate the options based on their unique circumstances. For example, those planning on owning a property for a long period of time might be better off paying stamp duty despite the burden of paying the lump sum up front.
Interestingly, when a buyer purchases a property and opts for property tax, the property tax remains permanently attached to the property and future purchasers have no option other than continuing the property tax.
Based on early indications provided in the Treasury paper, the average owner-occupier would pay approximately $1,600 in property tax annually. Residential investors and commercial landowners would pay higher rates than owner-occupiers.
Some are concerned that introduction of property tax could increase house prices, with buyers able to use the money they save on stamp duty to make higher offers. In the long term however, average house prices are expected to fall due to a more efficient market and better allocation of housing stock.
These reforms are proposed by the government in a bid to remove a major barrier to property purchase, increase the rate of home ownership and inject as much as $11 billion into the state’s economy over four years.
Considering initial tax payers concerns of increasing tax rates in the future and the possibility of vendors pocketing the upfront savings as the market adjusts to the reforms, it will be interesting to see how the transition unfolds.