Stamp duty (also known as a transfer duty), is a tax imposed by state governments when the financial transfer of an asset from one individual to another takes place. Stamp duty not only applies to property and real estate, however also applies to the transactions and transfer of ownership of other assets such as motor vehicles.
In New South Wales the cost of stamp duty always falls upon the buyer of property with the amount of stamp duty to be paid determined by either the sale price of the property in question or the market value of the property (whichever is higher). Each year the rate of stamp duty is adjusted to the CPI (Consumer Price Index), and is adjusted for inflation. Stamp duty rates correct as of July, 2021 can be seen in the table below.
|Property Value||Transfer Duty Rate|
|$0 to $14,000||$1.25 for every $100 (the minimum is $10)|
|$14,000 to $32,000||$175 plus $1.50 for every $100 over $14,000|
|$32,000 to $85,000||$445 plus $1.75 for every $100 over $32,000|
|$85,000 to $319,000||$1,372 plus $3.50 for every $100 over $85,000|
|$319,000 to $1,064,000||$9,562 plus $4.50 for every $100 over $319,000|
|Over $1,064,000||$43,087 plus $5.50 for every $100 over $1,064,000|
Stamp duty is an upfront cost of purchasing a property and as such can often be seen as a barrier to purchase as generally speaking this significant payment must be made within 3 months of signing a contract with this being especially true for first time home buyers who often have enough financial burden as it is when purchasing property. With a decline in home ownership in recent decades from 70% in the 1990’s to 64% as of 2021 with the cost of stamp duty being seen as a contributing factor to this decrease.
The New South Wales government has recently announced a number of possible stamp duty reforms, primarily aimed at reducing this upfront burden for first time home buyers and making entry into the property market easier, this however does have a number of pros and cons.
What is Annual Property Tax?
Previously, stamp duty has been paid as a lump sum, upfront payment within 3 months of a contract being signed for the transfer of a property, whether this being for an owner occupied property or investment property. With the proposed stamp duty reforms, first home buyers will have the option of paying stamp duty upfront as with the current system or will have the option of paying an annual land tax in which a yearly fee will be paid based on the value of the property that will offset the overall cost of stamp duty.
With an increase in the average age of first home buyers from 33 in 1995-96 to 35 in 2017-18 and with a decrease in first home buyers under the age of 35 from 69% to 65%, one of the purposes of the reforms are aimed at increasing property affordability for this younger age group.
The following table shows the proposed annual percentage of the unimproved land value (ULV) that would be paid as an annual property tax.
|Property Class||Fixed Fee||Annual Rate as % of ULV|
|Residential – owner occupied||$400||0.3%|
|Residential – investor owned||$1500||1.1%|
Apart from the obvious benefits especially for first time home buyers and not having the large upfront expense as a barrier to property ownership for younger home buyers, there are a number of other potential benefits of the proposed stamp duty reforms.
The proposed stamp duty reforms are aimed at making home ownership more affordable and achievable with it being estimated that the property tax proposal will allow potential home owners to enter the property market up to two and a half years sooner than with the current stamp duty system.
Housing and Labour Markets
Stamp duty has been seen as putting a hand brake on potential economic growth and has been criticised for having negative effects on both the housing and labour markets with a reduction in residential mobility. This can happen when people who do not intend to stay in a given location or sized dwelling for a long time delay the purchase of a property and wait in order to avoid paying stamp duty on a smaller property and then having to pay stamp duty again on a larger property or different location in only a few years time.
As well as having a number of potential positives for stamp duty reforms (hence the reason this has been proposed), there are a number of potential drawbacks that could also occur as a result of the reforms.
One of the major drawbacks of the proposed stamp duty reforms are that once a property has been opted into the annual property tax, this will remain for the lifetime of the property with any potential owners in the future unable to change this if they would actually prefer to pay stamp duty instead of paying annual tax.
Disparity and ULV Unimproved Land Value
The way in which the new annual tax would be calculated is based on the ULV (Unimproved Land Value), which is essentially the value of a block of land prior to factoring in the cost or sale value of the dwelling/s which is then built on the land. This has the potential to cause disparities in the actual cost of the annual tax based on the value of the land associated with the dwelling with an example being two different dwellings with a sale price of $1.7 million, a unit with an ULV of $106,000 and a house with a ULV of $720,000 with this meaning the respective annual taxes would be $717 for the unit and $2,500 for the house and thus a significant difference.
Short Term Price Rises
Another possible drawback to note is that due to not having a larger lump sum payment when purchasing a property, this could potentially cause a sharp increase in prices, and price the exact people these reforms are aimed at helping out of the market.
Not having to pay a lump sum stamp duty encourages a quicker purchase and then resale of the same property in a shorter time period (the sooner the property can be re-sold the less property tax will be paid by the owner in the long run), this would be beneficial for investors who can afford to purchase and likely be at the detriment of first home buyers.
With the proposed changes to stamp duty reforms there are definitely some positives for those who are trying to get into the property market in which the reforms are aimed at helping, however there are also a number of drawbacks that could act as further barriers of entry for these people. It will be interesting to see if these reforms are kept in their current state or are further amended in the near future.