NSW property tax and land tax – year end planning

First Homeowner Buyer Choice tax option

The NSW First Homeowner Buyer Choice option had a surprisingly trouble-free passage through NSW Parliament.  A buyer who settles on their first home from 16 January 2023 can elect to pay either the current transfer duty upfront or an annual property tax.

The choice is available to individuals who are over 18 years old.  The buyer, or for joint buyers at least one of them, must be an Australian citizen or permanent resident.  A buyer or their spouse must not have previously owned or co-owned residential property in Australia or received a First Home Buyer Grant or duty concession.

The residence being acquired must be worth less than or equal to $1.5 million.  As First Home Buyer duty concessions will remain, it is expected that the annual property tax will only be elected for properties priced or valued above $650,000.

There is a transitional arrangement for those who have executed a contract for their first home purchase on or after 11 November 2022.  If settlement occurs on or before 15 January 2023, they will be required to pay transfer duty, and then apply for a refund of the transfer duty after 16 January 2023.  If settlement occurs on or after 16 January 2023, and they have chosen property tax, they will not need to pay transfer duty.

Prospective first home buyers are wise to consider the annual property tax option carefully in view of their life plans, savings, income and price thresholds.  It is certainly worth delaying settlement until at least 16 January 2023 for cash flow purposes.  Particularly when bidding at auction, first home buyers should remember the advantages of adhering to a price ceiling of less than $1,500,000.

Land tax

The 2023 NSW Land Tax free threshold is $969,000 and the premium threshold is $5,925,000.  The rate remains at 1.6% rising to 2% for the unimproved land value above the premium threshold.  The effect of the land tax free threshold for taxable land with an unimproved value above the threshold is a saving of $15,504 in 2023 and rising every year.

A Land Tax liability in 2023 will be imposed if taxable land is owned at 31 December 2022.  For residential land sales contracts straddling 31 December 2022, contract agreements or variations by amicable parties can enable land tax savings for one party at no expense to the other in the following scenarios:

• If a taxable landowner is selling land to a buyer intending to use it as their exempt principal place of residence (PPR), bringing forward settlement into December 2022 from the new year can save the current landowner 2023 land tax on the property, and
• Alternatively, if the sales contract allows the prospective buyer to take possession of and occupy the property in 2022 as their PPR before settlement, the property can be treated for 2023 land tax as the buyer’s exempt PPR and not the seller’s taxable property.

The reverse can also apply.  If an owner occupier is selling their residence to an investor, delaying settlement until early 2023 can save the prospective buyer land tax in 2023.

Another planning opportunity arises for owners of two residential properties who have a choice to live in either.  As only one can be exempt, there is an obvious land tax planning incentive to be using and occupying the most valuable residence by 31 December. 

We commonly come across owners who end up paying tax on the higher valued property upon which they were undertaking works, or were actually building.  That property may be taxed in almost any circumstance where they are using and occupying their lower valued residence at 31 December.  We have seen scenarios where an owner could have saved themselves $30,000-$60,000 in one year’s land tax had they moved back into the higher valued property by the previous 31 December and ensured there is evidence of their use and occupation of it by that date.

The one scenario where two exempt PPRs can be owned at 31 December is where a second residence has been purchased by that date and the existing PPR will be sold in the new year.  That concession only applies for one taxing year.  This means, if you enjoyed this concession for the 2022 land tax year, you will be taxed on your former PPR in 2023 unless you settle on its sale by 31 December 2022.

Buyers, sellers, builders and renovators of residential property are wise to consider possible land tax planning before 31 December 2022.

Foreign Person Land Tax Surcharge

The Foreign Person Land Tax Surcharge rises from 2% to 4% in 2023.  It applies on the unimproved average value of land and there is no tax free threshold.

Many Australian residents who are not citizens may have Land Tax Surcharge liabilities that they are not aware of.  The most likely cohort is NZ citizens who are entitled to remain in Australia and have not applied for a permanent resident or special category visa.  All non-Australian citizens who own residential land in NSW should recheck their visa status.  Even where that is satisfied, the Land Tax Surcharge liability can apply to you unless one of two further tests is met:

• The land is your principal place of residence and you lodge a notification to that effect with Revenue NSW by 31 March 2023 (you must also be in Australia for 200 days in 2023 calendar year), or
• You were in Australia for 200 days in 2022 calendar year.

We suggest that these matters and the processes you need to follow be clarified by 31 December 2022.

Trusts and land tax surcharge

In 2019 and 2020, many trustees amended trust deeds to remove potential foreign person beneficiaries in order to escape Land Tax Surcharge.  It is important that trustees remain diligent and not actually make distributions to foreign persons, for example, where a family member is no longer an Australian citizen or where potential foreign person beneficiaries have recently “appeared” by way of marriage or birth.

Trustees of new trusts need to ensure the deed clauses effectively prevent foreign person beneficiaries if the trust is to hold NSW residential property.  Further, where trusts are to hold land in more than one Australian state, it is critical that the Deed clauses be effective to prevent the equivalent foreign person surcharge in all the states where property is held.

In NSW, Land Tax Surcharge exposures can arise for Trustees even if Revenue NSW has not taken action so far.  There are risks for testamentary trust deeds  from Wills executed from 1 January 2021 arising two years after the death of the landowner and also for land owned by corporate trustees.  It is not uncommon for Revenue NSW to incorrectly treat a corporate trustee as being a company that holds a beneficial interest in the land. That problem can also lead to ordinary Land Tax exposure where a discretionary trust is incorrectly given the tax free threshold.

Trustees with land owned in NSW are encouraged to use the time before year end to recognise and address any potential Land Tax and Land Tax Surcharge issues.

If you wish to explore these NSW tax planning opportunities, contact our Indirect Tax Specialist, Stephen Baxter, or alternatively you can contact your usual Mazars advisor via the form below or on:

Author: Stephen Baxter

Published: 24/11/2022

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