First home buyers purchasing properties up to $1.5m as their principal residence will now be able to choose to pay an annual property tax instead of stamp duty. Announced in the 2022/23 NSW State Budget, this proposed reform gives first home buyers a choice of opting out of stamp duty and instead paying an annual property tax.

How does it work?

The property tax will only be payable by first home buyers who choose it. Unlike earlier consultation proposals, the property tax will not automatically apply to subsequent purchasers of a property unless they are a qualifying first home buyer who also elects to pay the property tax.

Existing stamp duty concessions for first home buyers are available for purchases of up to $800,000, and these concessions will continue. [It is not clear at this stage if the election affects any entitlement to the First home Owners Grant. The First Home Buyer Assistance Scheme which provided a full exemption for new homes up to $800,000 and a concession for new homes up to $1m ceased from 31 July 2021.]

Who is eligible?

• you must be an individual (not a company or trust)
• you must be over 18 years old
• you, or at least one person you’re buying with, must be an Australian citizen or permanent resident
• you or your spouse must not have previously owned or co-owned residential property in Australia or received a First Home Buyer Grant or duty concessions.
• the property must be worth less than or equal to $1.5m
• you must move into the property within 12 months of purchase and live in it continuously for at least 6 months

Additionally, the contract of purchase must be entered on or after the scheme commencement date:

• for a contract of purchase on or after 16 January 2023 an eligible purchaser may opt into the property tax and will not be required to pay stamp duty in order to complete their transaction.
• for a contract of purchase between the passage of the legislation and 15 January 2023, an eligible purchaser will be required to pay any applicable stamp duty within the usual required periods and from 16 January 2023, will be able to apply for and receive a refund of that duty.

Stamp duty or annual property tax?

Eligible purchasers can choose between:

• paying the usual amount of stamp duty based on the ‘dutiable value’ of the property (i.e. the value including any improvements) or
• paying an annual property tax based on the unimproved land value of the property.

Property tax rates

The property tax rates for 2022-23 will be:

• $400 plus 0.3% of land value for properties whose owners live in them
• $1,500 plus 1.1% of land value for investment properties.

These tax rates will be indexed each year. Unlike land tax, annual property tax assessments will be issued in respect of financial years and not calendar years.

What about principal residences?

Whilst the property is occupied as a principal residence it is likely to be exempt from land tax. However there was no announcement that the property would be exempt from land tax whilst subject to the annual property tax.

Once it ceases to be the principal residence, it is possible that both the annual property tax (at the 1.1% rate) plus an annual land tax could apply – for instance, where the owner decides to move interstate after 6 months occupation and then rent out the property.

It is assumed that there will be some process to adjust any election if the property Is not occupied for the continuous 6 months and retrospectively assess transfer duty.

For properties that are owned for less than a full financial year, a pro rata adjustment to the annual property tax will be made based on the number of days in the year the property is owned. There will therefore be no need to adjust for the annual property tax on the sale of the property.

Click here for more information about NSW considering signifcantly expanding the stamp duty regime.

How can SW help?

Please reach out to one of our tax and property experts below for assistance navigating the implications and opportunities of the property tax reform.

Contributor

Robert Parker

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