Proposed NSW Property Tax Regime: Stamp Duty Dilemma

Summary

• The NSW government has proposed a property tax reform over the existing stamp duty regime.
• The new reform to have perpetual, annual obligations to be paid in place of the existing lump sum tax amount paid upon buying a home.
• The NSW government estimates this reform to inject $11 billion in next four years into the economy and create new jobs.
• Critics of the reform argue that prices would increase due to insufficient supply of property against the increased demand post reforms.
• New home buyers are the heart of this reform, which is why public consultation is being sought on the matter.

New South Wales treasurer Dominic Perrottet recently announced the proposal to move towards a new property tax regime. This regime would allow taxpayers to choose between paying a lump sum stamp duty while purchasing a property or paying an annual property tax for as long as they own the house.

Removal of the previous stamp duty was on the government’s table since 2017. It was suggested in the Productivity Commission’s 2017 five-year review based on the premise that a reform was needed to improve the standard of living of the people.

The new proposal does not remove the previous stamp duty which was offered upfront while purchasing a house. Rather it provides a choice to house buyers, between the two methods of tax payment.

ALSO READ: One Nation Leader Mark Latham Labels NSW’s Energy Roadmap as a “New Tax”

The Need for A New Reform

The stamp duty has been levied on property purchases since 1865 and has been argued by economists for some time now. Taxes lead to market inefficiencies and can lead to some level of welfare loss as well. However, this loss is especially high in case of a lump sum stamp duty.

A high payment upfront changes the future course of actions taken by the house buyer. Paying a large amount in the beginning itself perhaps discourages individuals from shifting to a better house when needed. Individuals might be tempted to renovate the house, rather than shift to a better location.

Thus, the stamp duty becomes a sunk cost for the buyer. However, a sunk cost should not influence the future course of action for an individual as it may lead to bad decisions. Sticking to the current house even when there is a need for a better place to stay in, is a sunk cost fallacy.

This tendency of sticking to the current housing property leads to inefficient allocation of land. Retirees might want to purchase land better suited for their needs, away from the main city and in a quieter neighborhood. This would become difficult when they are mandated to pay a stamp duty upfront. Thus, a land better suited for retirees might be allocated elsewhere, due to an inefficient taxation policy.

Proposed Changes by the Government

The stamp duty imposed on the purchase of new property is usually a little under 4% of the property value. The new scheme would allow for an annual payment set up that stays in place for the buyer and for subsequent owners of the property.

When the buyer decides to move from the house, they would not be affected. Instead they would have to pay the annual property tax of the house they move into.

It is estimated that the new regime would require house buyers to pay a $500 tax upfront plus 0.3% of the land’s unimproved value. Owner-occupiers and farmers would have to pay a lesser annual tax than housing investors, who would be paying a lesser tax than commercial property owners.

This new scheme would also remove the existing NSW land tax, which is levied on residential properties other than the primary place of residence of the homeowner. These may include investment properties and holiday homes.

Price thresholds would be put in place to limit the number of properties eligible for transition. The government would ensure that over 80% of the residential properties are eligible to opt-in from the first day.

The scheme also entails the provision of curbing an increase in rental rates that happen without the tenant’s agreement. The scheme has been developed as such that it remains revenue neutral to the government. Presently, the government might face losses. However, these would be recovered as the tax rates would be brought closer to the level of stamp duty and land tax.

Potential Benefits from the New Scheme

A consultation paper has been released by the NSW government detailing the changes to the NSW property tax. The paper states that this proposal could inject $11 billion into the economy over the course of 4 years. This reform is expected to boost the economic growth and bring the economy out of turmoil amid the pandemic.

The reform is expected to boost home ownership. This is especially significant in the current scenario where the demand for houses and property has become largely skewed in certain areas. According to the NSW government, the new scheme would make house more accessible and affordable by putting a downward pressure on prices for the long term.

The NSW government also estimates that the property reforms would lift GDP by 1.7% and increase employment by 1.4%. This figure amounts to an additional $3,300 worth of income per household and 75,000 additional jobs in NSW.

The Critics

The creative decision of the government to offer a choice between paying the stamp duty and going for an opt-in was made to avoid double taxation for those who have already paid stamp duty. However, experts are of the opinion that there should not be a choice offered to the land buyers. Instead, stamp duty should be abolished altogether.

It is possible that a percentage of the population would opt for the new scheme while the remaining pays stamp duty. Thus, full effects of the reform may not be realised in such a scenario. Thus, the optional nature of the property tax, might lead to the government facing a shortfall in budget.

If the government decided to fund this shortfall by increased taxation in the future, then it might be a risk for the home buyers. This would again be an inefficient method of taxation as it would benefit current home buyers at the expense of future home buyers.

The sudden boost in demand that is expected to arise out of this reform will come with its own set of challenges. An increased ratio of the population would be willing to spend the money that they have saved to pay stamp duty. With the current provisions, they could buy a house by paying a much lesser tax at the initial stage. However, this increased demand would be met with insufficient supply of property. Therefore, prices are bound to rise.

Some experts are still skeptical about the proposed benefits associated with the land tax reforms. The switching of taxation from the stamp duty to the property tax could shake up the market. There is a certain degree of uncertainty surrounding the tax payments under the annual property tax. These payments are also expected to go on perpetually, and the rates might rise in the future. Thus, there are divided opinions about the effectiveness of the scheme.

A large factor changing the way the reform takes shape is how it is implemented. The new home buyers are the heart of this reform, which is why public consultation is being sought on the matter.