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The winners and losers of the proposed stamp duty changes in NSW

30 November 2020 David Hancock
David Hancock

In news that has been welcomed by many, the NSW government has announced a proposal to phase out stamp duty in an effort to stimulate the NSW economy and create a more reliable and consistent tax revenue stream. The proposal will be open to public consultation until March 2021.

Assuming the proposal is passed, purchasers will have a choice between paying a one-off upfront stamp duty charge or a smaller annual property tax. Similar to how council rates work, the property tax would likely be a fixed charge, plus a rate based on the unimproved land value of the property.

How much is stamp duty in NSW?

Currently, stamp duty in NSW can be an expensive upfront cost for buyers. It’s calculated based on a sliding scale against the property’s purchase price (see figure 1).

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Property’s purchase price

Transfer duty rates

$0 – $14,000

1.25% of the property’s value

$14,001-$30,000

$350 plus 2.4% for every dollar over $25,000

$30,001-$80,000

$415 plus 1.75% of every dollar over $30,000

$80,001 to $300,000

$1,290 plus 3.5% of every dollar over $80,000

$300,001 to $1,000,000

$8,990 plus 4.5% of every dollar over $300,000

$1,000,001 to $3,000,000

$40,490 plus 5.5% of every dollar over $1 million

$3,000,001 and over

$150,490 plus 7% of every dollar over $3 million

Figure 1: Stamp duty rates in NSW

Let’s look at an example. If you’re buying a house in Sydney, where the median house price sits at $1,154,40, you’re likely to pay over $40,000 in stamp duty alone. That’s a significant upfront cost which can create a higher barrier to entry. Of course, in other NSW markets where property values are much lower, stamp duty won’t be as much of a burden.

While the rates for the proposed property tax are yet to be disclosed, we do know that it will be a smaller charge applied annually.

Who will win from the changes?

Removing the upfront cost of stamp duty, especially in markets where property values are high, will clear a significant hurdle for many buyers. This is especially true for first home buyers who may have previously struggled to save enough to cover both a deposit and stamp duty. It’s also expected that downsizers, who previously may have seen stamp duty as a disincentive to sell up and move, will be more motivated to downsize. This should see more sales activity among these markets.

Investors with smaller deposits could also benefit. A lower upfront cost frees up cash flow and reduces barriers to entry, making property a more attractive asset class for investors.

The changes won’t apply retroactively. Therefore, for any properties already purchased, no additional charges will apply.

Anyone who moves frequently will benefit from the tax as it is expected they will pay less overall. This could incentivise people to upgrade regularly rather than stay in the one home for the long term.  

First home buyers who were previously eligible for first home buyer grants, which either removed or discounted stamp duty, are expected to receive a new grant of up to $25,000.

Who will lose from the changes?

Canstar has calculated how buyers may be advantaged or disadvantaged based on a scenario where the property tax will comprise a land tax of $500 plus 0.3 of a percentage point per annum on the unimproved value of the property. Keep in mind, this is indicative only as the anticipated rates, for the property tax are yet to be disclosed.

In Canstar’s scenario, for a property worth $700,000 with a land value of $490,000, the property tax will end up costing more for the owner after 15 years. The same goes for a property worth $1,000,000 with a land value of $700,000. For those who hold onto their properties for the long term, it is likely that an annual property tax will actually cost them more.

Once a buyer elects to convert a property to the annual property tax, all subsequent buyers will also have to pay the annual tax on that particular property. They won’t have the choice to select upfront stamp duty instead. This could create a situation where properties locked into the annual property tax become less attractive to buyers intending on staying for the long term.

How will the changes impact property values?

Realistically, we won’t see the stamp duty changes take effect until mid-2021 at the earliest. This means in the short term, we might see less demand as would-be buyers hold off until the changes take effect, although with record-low interest rates this seems unlikely.

Once the changes take effect, we’re likely to see an increase in supply as more people downsize or upgrade. However, this is likely to be offset by increased demand from first home buyers entering the market and more investor activity.

David Hancock is the director of Binnari Property.

The winners and losers of the proposed stamp duty changes in NSW
David Hancock reb
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