EPI 149 | Stamp Duty Reforms – What do they mean?

Everyday Property Investing

What is stamp duty?

(From Business.gov.au)
Stamp duty is a tax that state and territory governments for certain documents and transactions such as:

• Vehicle registrations and transfers
• Insurance policies
• Leases and mortgages
• Hire purchase agreements
• Transfers of property (business, real estate, some shares)

With respect to stamp duty on a property purchase this is usually paid in a lump sum up front by the buyer as part of the transaction so it forms a big ticket cost item that buyers have to have ready and available in order to purchase. Typically, as a purchase cost, it’s not part of a home loan and so this large sum really eats into the deposit funds of buyers and so impacts on affordability of housing and makes it more difficult for homeowners to move.

The amount is dependent upon the transaction and also the state or territory in which the transaction takes place but to give you an idea – for an investment property purchase of $800,000 with the average cost being around $35k. It represents around 25% – 28% or so of state taxes collected and so is a big ticket income provider for state governments also. Note that there are often concessions available for some groups, for example, home buyers, first home buyers.

What are the proposed reforms?

Housing affordability is a big ticket item and always is. The reason this has become topical is that the NSW State Government has proposed changes to the way stamp funds are collected to potentially, improve housing affordability. The actual proposed changes are that first home buyers, buying a property under $1.5m would be given the choice to either: Pay stamp duty up front OR to pay an annual property tax over on an ongoing basis.

First home buyers will pay an annual property rate of $400 plus 0.3 per cent of the land value of the property each year.
Eg land value $500K = $1900 pa

Investors – $1,500 plus 1.1 per cent of land value for investment properties.
Eg Land value $500K = $7,000 annual tax

You can read more about the specifics of this proposed change on the NSW state government website.

How will this change impact?

It is likely that this would roll out across all states over time. Also likely that this would be extended to all home buyers and to investors.

Pros

• Help first home buyers
• Reduce transaction upfront costs
• Encourages transactions rather than making a barrier
• May encourage downsizing to apartments (because the land value is lower, therefore the annual tax would be lower and price points will be under the $1.5m threshold)
• More opportunity for flipping as transaction costs are lower, improving profitability
• A more predictable and stable tax over time for government
• Opportunity for developers and renovators to cater to the market and win
• Investors could follow the roll out around the state if an investor who flips – buy unrenovated, renovate for target market, this sector of market should see upward growth in short period, investors have a window to capitalise

Cons and potential threats

• If you hold the property long term then it could become more expensive than the upfront tax as it’s a ‘forever tax’
• The amount would be increased over time with indexation and increased land value of property
• Older homeowners with little income (e.g. pensioners) may struggle with this increasing and ongoing tax
• If you stay in a property long term and continue to pay this tax you would be significantly behind compared to the current lump sum scheme.

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