Home buyers beware: NSW property tax comes with a catch

Home buyers beware: NSW property tax comes with a catch

In response to the NSW Budget, peak accounting body Chartered Accountants ANZ (CA ANZ) said that people will need to crunch the numbers to identify if they are better off paying up-front stamp duty or ongoing annual property tax.

CA ANZ Senior Tax Advocate, Susan Franks, warned home buyers that the temptation to avoid a significant upfront stamp duty may be one which is best avoided.

“Stamp duty is a significant amount of money for those looking to buy their first property. A $1.2 million property attracts over $50,000 of stamp duty,” Ms Franks said.

“It is not surprising that people will look at alternatives to paying stamp duty.  But what’s best for you could be an entirely different question.

“For those who like certainty and intend to hold a free-standing property for a substantial period as a principal place of residence, stamp duty may be preferable to an ongoing property tax.”

Ms Franks said that first home buyers will need to crunch their numbers carefully to determine whether opting for property tax is beneficial. Whether you end up paying more under stamp duty or property tax depends upon:

·                How long you hold a property: While half of all purchasers sell their property within 10 years of purchase, many people hold their properties for substantially longer.

The NSW Government research indicates that more than 29 per cent of people have held a particular parcel of property for more 17 years. 

·                The type of property you purchase: The land value associated with a unit is generally a much lower percentage of the unit’s market value than the land value associated a free-standing house, thus a unit will generally pay less property tax than a free-standing house.

This is best illustrated by an example which uses real data for two properties which are located within a radius of 6-7 kilometres that sold within seven days of each other, both for $1.7 million. One is a unit and the other a house.

The stamp duty payable in relation to each of these properties is $78,067. In contrast, the property tax associated with these properties would be very different.

The new 3-bedroom unit has an unimproved land value (UIV) of $105,924 and the older 5-bedroom house has a UIV of $720,000.

The unit would therefore have an annual property tax of $717 ($400 + [$105,952 x 0.3%]) and the house would have one of $2,560 ($400 + [$720,000 x 0.3%]) – more than 3.5 times that of the unit.

 

·                Future land and tax changes: Stamp duty is a once off fixed amount, so once you’ve paid it, you’re done and can move on with your life.

In contrast, property tax is an ongoing payment that can increase due to the underlying land value increasing and the tax rate increasing (property tax rates will be indexed each year).

Property tax will also increase if you change your use of the property from principal place of residence to an investment property.  Property tax will then become payable at $1,500 plus 1.1 per cent of the unimproved land value.

·                Stamp duty exemptions and concessions: First home buyers who purchase a property for $650,000 or less don’t pay stamp duty and would have no incentive to opt into property tax.

In addition, first home buyers who purchase a property between $650,000 and $800,000 can obtain stamp duty concessions, which could change the equation in favour of a one-off payment.

“While economists argue tax reform that moves from stamp duty to a property tax has the potential to benefit the economy, home owners need to understand how this proposed tax reform will affect them personally,” Ms Franks said.

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