NSW – A tax choice to assist first home buying

Currently, first home buyers add the upfront duty payable to their borrowing requirement directly affecting both their loan limits and repayment capacity.  Under the new proposal, they will simply pay the annual property tax out of their subsequent annual income.  Over a period of rising interest rates, it is not hard to recognise that satisfying their bank’s upfront lending requirements will be easier than if they had to pay upfront duty.  However it is also easy to foreshadow that many buyers will struggle with the financial discipline needed to fund the property tax when the annual assessments arrive.

Summary of the Annual Property Tax

The main features of the proposed property tax option are:

• It will only be available to eligible first home buyers purchasing a property for up to $1.5m
• It will apply where the date of completion of the property purchase is on or after 16 January 2023 and will be assessed soon after 1 July each year. The tax will be prorated based on the days of ownership in a financial year
• The tax payable will be $400 plus 0.3% of the unimproved land value
• It will apply as long as the first homebuyer remains an owner/occupier.  If the property status changes to investment, the annual property tax will increase to $1,500 plus 1.1% of the unimproved land value.
• A property will not be locked into the annual property tax for subsequent purchasers. If another first home buyer is the next purchaser, they will have the option of the annual property tax.  By contrast, if the purchaser is a non-first home buyer, transfer duty will be payable.
• Various measures will be in place to ensure affordability including the First Home Buyers Assistance Scheme, deferral schemes for hardship scenarios and indexing of rates to ensure that average property tax payments grow in line with average incomes rather than land values.
• For purchase contracts exchanged between the date of enactment and 15 January 2023, the eligible first home buyer will be able to opt in retrospectively and receive a refund of transfer duty paid from 16 January 2023, and
• The annual property tax option is NOT available to existing or former homeowners, to investors, on purchases of commercial, retail, industrial, infrastructure, primary production or commercial residential property.

At a time when first home buying affordability is a front page political issue, it is likely that the independents in the NSW Upper House will support the new tax choice hence it will become law.  However, no doubt the detail of this complex measure will be closely scrutinized in Parliament and its final form may be different.

The choice between the existing transfer duty and the proposed annual property tax will no doubt add complexity to the first home buying process for everyone.  That process will be further complicated for those prospective buyers willing to purchase on either side of the Murray or the Tweed.  It would not surprise if the new tax choice might cause some buyers in the border regions to move from Victoria or Queensland into NSW.

Other Budget Announcements

Other measures announced in the NSW Budget are:

• Land Tax Surcharge – will increase from 2% to 4% for residential properties owned by foreign persons as at 31/12/2022
• Land Tax early payment discount – will decrease from 1.5% to 0.5%
• Payroll Tax exemptions for future industries - grants and payroll tax exemptions totaling $51m over 5 years will be available from the Future Economy Fund to encourage businesses in “future” industries to establish or expand in NSW.  There is little detail at this stage and this does not appear to be a broad or generous scheme  
• Gambling Taxes – there are increases in the Point of Consumption tax rate to 15% and effective betting tax rates to 15%.  This will raise $740m over four years, largely from online bookmakers.

Please contact your usual Mazars advisor for more information, or alternatively contact our NSW indirect tax specialist, Stephen Baxter on +61 2 9922 1166. 

 Author: Stephen Baxter

Published: 29/06/2022

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