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NSW to phase out stamp duty and bring in land tax

NSW is set to move forward with plans to phase out stamp duty and introduce a land tax as a part of the upcoming pre-election budget.

But real estate industry experts aren’t so sure the plan will benefit homebuyers.

According to the Sydney Morning Herald, NSW Premier Dominic Perrottet will look to embark on significant reforms that will allow some homebuyers to opt into a land tax rather than pay stamp duty.

The proposed changes mean that NSW and the ACT would be the only states to overhaul the current stamp duty model. The ACT is in the process of phasing out stamp duty over a 20-year period that began in 2012.

Under the current proposal, the top 20 per cent of NSW residential property prices would not be able to opt in for land tax and would need to pay stamp duty, to help reduce the decline in the government’s revenue, with previous buyers not impacted by any changes.

The changes would see a land tax permanently locked to a property, so future owners would have to pay the land tax if it had previously been in place with a former owner, leading to stamp duty being phased out over time across NSW.

Real Estate Institute of NSW (REINSW) Chief Executive Officer Tim McKibbin said the institute hadn’t been consulted on the most recent announcement and worried any tax changes wouldn’t benefit home buyers.

“My fear is that we’re just going to be trading one bad tax for another one,” Mr McKibbin said.

“I think we need to be having a sensible tax discussion involving all three levels of government.

“In this space, 40 per cent of the cost of a new property is taxes and charges across all levels of government.

“The premier is saying this change in tax is going to improve affordability, but I’m yet to see how that’s going to happen.”

Mr McKibbin said at this stage the government hadn’t provided any details as to how a broad-based property tax would look or how they intended to roll it out.

“It concerns me that there’s been an announcement and we haven’t been provided with any details on what it means and when it is going to take effect,” he said.

“My fear is that people are going to wait until a property tax comes in so they don’t have to pay the stamp duty.

“We’re already dealing with a market that has got the jitters with interest rate rises and now we have an announcement that says property tax is better than stamp duty, so potential purchasers might sit on their hands until they find out what’s going on.”

Mr McKibbin said while there were benefits to a land tax from the government’s perspective, there also needed to be protections in place for people who might be indirectly impacted such as renters.

LJ Hooker Head of Research Mathew Tiller said the proposed land tax was an important first step by more reform was needed.

“It is important to remember that the proposed change continues to impose a high tax burden on housing, adds cost to purchasing a home – replacing one tax with another tax – and it will further eat into household budgets,” he said.

“We would prefer reform that reduced the overall tax burden that is placed on real estate and improves affordability.

“One negative that has been identified in the consultation process is that the proposed changes will create a two-tier tax system where buyers choose a property based on the stamp duty or land tax status of a property.”

Mr Tiller said the current stamp duty was not suitable for the modern property market with the current system reducing affordability by increasing the cost of buying a home.

“Stamp duty entrenches the inefficient allocation of housing by stopping people from buying and selling property to suit their individual needs,” he said.

“It stops people from downsizing and families from upsizing, and as a consequence keeps people in unsuitable homes for longer. In addition, it also prevents people who may need to sell due to a change in their situation such as divorce, death and unemployment.”

However, Mr Tiller said there would be some benefits of the proposed land tax, including reducing the time it takes first home buyers to save for a property.

Under the proposed changes, residential owner-occupied and primary production properties would pay lower rates than residential investment properties, which in turn would pay lower rates than commercial properties.

The land tax would be an annual tax based on unimproved land value. Existing stamp duty concessions for first home buyers would be replaced with a grant of up to $25,000.

NSW Treasury has estimated that an optional annual tax would collect about 20 per cent less revenue, which equates to a projected shortfall of about $2.5 billion a year.

The premier was one of the main supporters of stamp duty reform as treasurer, describing it as an “inherently terrible tax”.

However, Mr Perrottet has repeatedly said the state could not afford to overhaul the tax system without financial help from the Federal Government.

“We need the Federal Government to help the states finance reforms to drive productivity to improve social outcomes like housing affordability, health care and education,” Mr Perrottet told the SMH.

According to Revenue NSW, the government collected $12.2 billion from land-related transfer duty in the 10 months to April 2022, compared to $9.6 billion in land duty collected in 2020-21.

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.

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