What are the Proposed NSW Stamp Duty Changes?

Introduced in the 2020-21 Budget, the NSW Government announced a proposal to change the way the current tax system is set up when purchasing properties. 

This proposal involves giving property buyers the choice to pay stamp duty (and any existing land tax, where applicable) as per the current process, or alternatively elect to pay a smaller annual property tax. 

What effect will the proposed changes have on the economy

In their research of the current proposal, the NSW Government has estimated that this change to the tax structure will provide many benefits to the state such as boosting home ownership, enhancing household mobility, growing the economy and creating jobs. Regarding the economic changes, its estimated that this reform could allow more than 300,000 NSW residents to own their home and increase the Gross State Product by 1.7%.¹

These proposed changes will have a great effect on the economy as seeing an increase in homeowners will inject $11 billion back into the economy over the first four years. This short term gain is viewed as a significant improvement to aid the state in its economic recovery after the effects of COVID-19. 

The long term effects this proposal is estimated to have on the economy will be providing an extra $3,300 of income per household and 75,000 additional jobs.² Despite the potential upfront costs associated with the state, this proposal is expected to have productivity benefits that will be approximately 30 times higher than the costs. 

Why is there a proposed change?

This change to stamp duty has been proposed as a way to innovate the current tax structure and create better opportunities for potential homeowners. 

The current structure of charging stamp duty has been criticized recently for having “negative effects on housing and labour markets and restricting residential mobility”,³ and is viewed as putting a brake on economic growth. Stamp duty has a direct impact on home buyers' decisions and can delay the process, as many people will choose to defer the purchase of a smaller property and save for a larger and more expensive home in order to avoid paying stamp duty twice. This proposal gives people the choice to choose whether they would be better off paying stamp duty or opting in for an annual property tax depending on their situation. 

The need for a proposed change for stamp duty has grown from the fact that home ownership in NSW has declined from around 70% in the 1990s to around 64% today.⁴ As stamp duty is viewed as one of the key barriers to home ownership, providing the option to people and keeping property tax more affordable will be used to see home ownership rates increase. 

How might this affect First Home Buyers?

One of the key rationales behind this proposal by the NSW Government is to boost first home ownership as the average age of first home buyers in NSW has increased from 33 to 35 years old from 1995-96 to 2017-18.⁵ As the housing market in NSW has increased over the last two decades the amount of first home buyers under 35 has declined from 69% to 55%,⁶ highlighting the difficulties to enter the market for first home buyers. 

Currently the government waives stamp duty to first home buyers purchasing homes up to $650,000 ($800,000 for new homes) and provides concessions off stamp duty for homes valued up to $800,000 ($950,000 for new homes) to help overcome this barrier to entry. Unfortunately with house prices consistently increasing in NSW, this leaves approximately a third of all first home buyers paying the full amount of stamp duty.⁷

A component of the proposal to further benefit first home buyers would be to replace these existing stamp duty concessions with a grant of up to $25,000. However, further details on this new grant are yet to be determined.

By replacing stamp duty with an annual property tax, the upfront costs of purchasing a property would be lowered which would be beneficial to first home buyers who have had less time to save for a deposit. 

How might this affect Investors?

This proposal looks at not only boosting first home ownership across the state but aims to improve the total home ownership figures across both owner-occupiers and investors. 

Currently, investors pay stamp duty up front when they purchase an investment property as well as an annual land tax on any land above the land tax threshold. This proposal aims to combine both stamp duty and land tax in the one annual property tax payment for investors. While the tax rates for investors are still higher than owner occupied homeowners under this new proposal, the proposed property tax would be tax deductible for investors. 

Estimator Tool

In addition to the property tax, the government has announced the development of an online estimator tool. 

This tool would allow purchasers to search the property tax amount for a particular property for the current year and compare this with the stamp duty that would be charged based on an estimated sale price. This will allow all potential homebuyers to understand the difference between the two options and make a more educated decision on which option would be right for their circumstances. 

Until this tool is available, the Government has provided basic examples of each scenario for all different types of home owners here.

In June 2021, The NSW Government released a Progress Paper to build on community feedback and provide another level of policy detail. You can find more information on the proposed changes to stamp duty in NSW. You can read the paper here. 

The Government will be continually seeking further feedback on this policy until Friday 30th July 2021. If you’d like to have your say, you can provide additional comments here.