As it is still merely a proposal, it does not appear that the following year forecasts in the budget have taken such a move into account. That said, the Draft Report contained a number of approaches to manage the transition, and NSW Government material released yesterday indicates the Government’s current thinking on a preferred transition model.
As discussed in our earlier article, transitioning from duties to land tax (or a different “property tax”) will create winners and losers. We expect this will be difficult to message and manage. As a way of generating public buy-in to the proposal, a public consultation is now open until 15 March 2021.
When will it commence?
This is a big change affecting many taxpayers (both current and new). Home ownership data from the ABS in 2019 says that 64% of taxpayers are home owners. We believe it will be a stretch to make the switch from stamp duty to land tax by next year’s budget which we presume will return to its normal budget cycle in June 2021. However, it is possible to accelerate the process. We expect that the NSW Government would prefer to give the real estate market certainty in a short timeframe and for the proposed change to be implemented well before the next election in 2023.
Preferred transition model – opt-in and differential rates
While the Draft Report identifies a number of approaches which could be implemented, the Consultation Paper – Buying in NSW, Building a Future (Consultation Paper) gives some insight into the current Government thinking.
The proposed system would commence with a choice to either pay upfront stamp duty or an annual property tax, with a potential retrospective opt-in for purchases made in “the months” prior to commencement. A threshold will be in place such that purchasers of expensive homes will have no choice but to pay stamp duty. While the Consultation Paper doesn’t state what a threshold might be, reading between the lines, it may be as low as $1.2m land value (say, $1.8m market value), which would effectively exclude many of the more affluent suburbs of Sydney.
A potential cash grant of $25,000 for first home buyers could be available if they opt-in to the property tax system.
However, once a property is “in” the property tax system, it stays in. A later purchaser will not have the luxury of choice. As such, it indicates that there will be different practical effects depending on the generation of transfers:
- First-generation – all sales below the yet-to-be-determined threshold have the advantage of opt-in.
- Second generation – some sales have the advantage of opt-in while others will already be in the property tax system. The Consultation Paper predicts that this generation will last for at least 20 years.
- Final generation – nearly all sales will be subject to the property tax system. The Consultation Paper indicates that the debt incurred to fund the transition will not be paid for 50 years, which could indicate how long the transition period might last.
One of the pillars of policy driving the change as set out in the Treasurer’s Budget speech is making it easier for first home buyers to get into the property market, particularly in Sydney. Removing a $30-$70k (or more) barrier to purchasing a home might seem to do the trick. But one wonders whether that effect is confined to the first generation of transfers. Once the second and later generations of transfers are being made, query whether the lack of upfront duty will have effectively increased what the market is willing to pay and whether it creates an even greater disincentive for people to move to a more suitable home when their current home is protected from the property tax. Could it simply be a transfer of value from the State to the seller?
As predicted in our earlier article, differential rates will be necessary to get to a position that a similar amount of tax will be paid under the new property system than what is paid now in stamp duty (but for the timing difference). Of course, that will depend on the amount of time the property is held and the rate in which the value of the property increases over time. We have adjusted our previous model (using properties sold last weekend) to take into account the proposed rates in the Consultation Paper:
|Purchase Price||Stamp duty||Land value||Property Tax (home or farmland*) - $500 + 0.3%||
Property tax (residential investment^)
$1,500 + 1%
Property Tax (commercial^)
|3 bedroom house in Epping||$1,790,000||$83,455||$1,160,000||$3,980||$13,100||$30,160|
|3 bedroom house in Seven Hills||$850,000||$33,585||$467,000||$1,901||$6,170||$12,142|
|2 bedroom unit in Randwick||$880,000||$34,935||$316,667||$1,450||$4,666||$8,233|
|3 bedroom unit in Campbelltown||$540,000||$19,635||$87,360||$762||$2,374||$2,271|
*Farmland does not have the $500 upfront amount and assumes that the land is below the yet-to-be-determined threshold.
^Noting that this replaces land tax on properties currently in the land tax system, but by having no threshold, brings many more properties into an annual property tax system. According to the Consultation Paper, there are currently about 8.5% of residential properties and 25% of commercial properties subject to land tax.
Using these examples, disregarding any increase in property value over time, a purchaser of a home would be economically better off to opt-in if planning to live in the property for up to 17-25 years depending on the property.
What we don’t know
There are a number of obvious gaps so far, including the effect of subdivision and sales of homes in new estates, and whether the “opt in” choice will be grandfathered through the subdivision process. It is also unclear how the “opt-in” model applies to landholder duty, being a tax on a change in owner of the land, rather than a transfer of the land itself.
Also, as discussed on last night’s episode of ‘The Drum’, could this be an effective death tax in disguise? Again, because existing property owners will “never” be subject to the property tax, it should not be practical issue for the Baby Boomer generation, unless the owner wishes to downsize or otherwise move. Depending on the take up of the “opt-in”, such a move could result in annual property tax bills which will need to be funded through retirement. A quick answer to that could be that such tax could be deferred until sale or death, with the estate being responsible for the deferred tax in the latter example. In addition, it is not clear what the intention is in the event that the property passes to beneficiaries of the estate – will they have the benefit of opt-in, or will they be forced into annual land tax bills (similar to the introduction of CGT). That would be a significant practical shift in policy, as currently transfers of land upon death are usually exempt from stamp duty.
What does this mean for foreign surcharges?
Foreign surcharges do not get a mention in the Consultation Paper. Presumably, surcharges would still apply.
Grant Thornton will run client workshops for effected industries in February 2021 ahead of the deadline for public consultation. COVID-safe procedures permitting, we hope to use it as a time where we can see our clients in person after what has been quite a disruptive year.