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First-home buyers in NSW can now opt to pay stamp duty or an annual property tax, but which one works out better? Shore Financial broker Theo Chambers unpacks the detail of the stamp duty reform
NSW passed stamp duty reform in November last year, and much like any significant regulatory change that impacts first home buyers, several misconceptions and myths have been circulating regarding the changes.
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Put simply, these changes mean NSW first home buyers now have the option to either pay stamp duty upfront or an annual property tax. This tax for is either $400 plus 0.3% of the land value of the property being purchased, and applies on owner occupier purchases of property up to a value of $1.5 million or vacant land up to $800,000.
While the reforms sound relatively straightforward, the wider implications - particularly when it comes to speculation on the negative consequences of opting in for the new scheme - have birthed a range of myths that seem to be gaining traction. Ultimately, it’s clear the general public doesn’t have a clear idea of what opportunities the scheme brings.
So let’s break down what these changes really mean for first-home buyers. To start with, opting for the new land tax option has the potential to slash the upfront lump sum cost of stamp duty. A minimum deposit required with stamp duty on a $1m property is around $93,000, but by opting in for land tax, this would be reduced by 48%, bringing down the deposit required to approximately $56,000.
This is where some of the myths begin to creep in, with many keen to point out that over a few years, annual land tax would work out to more than the cost of stamp duty. In reality, this is false for most people. If we look at the facts, half of all owner-occupiers sell their property within 10.5 years in Australia. Shore Financial generally witness that first home buyers would also realistically only own their first house for 5-6 years. It would take someone paying annual land tax approximately 14 years on an $800,000 property (if you assume 2.5% growth on land value per year) to break even with the cost of paying stamp duty on the same property.
A further fact that many first-home buyers are not aware of, is that regardless of how long you intend to have the property for, if you sell the property after a few years, no further stamp duty is required to be paid.
The scheme also allows for land tax to be applicable on investment purchases, not just owner-occupiers. However, you must move into the property within 12 months of purchase and live in it continuously for at least six months.
Furthermore, let’s address another wrong claim that this stamp duty reform will only serve to increase house prices. While the policy may have a slight initial effect on house prices - given first home buyers are still competing with buyers having to pay full stamp duty - it is almost impossible to measure whether this will have any meaningful impact on prices.
I’ve also seen suggestions that the new policy will see existing stamp duty exemptions abolished. This is completely untrue, and those buying properties under $650,000 will still be able to get a full stamp duty exemption, and a marginal exemption up to $850,000 (the latter will, however, make a buyer ineligible to opt-in for land tax).
Another common misconception is that the annual land tax is based on the purchase price. This too is false. The annual land tax is calculated based on the land value of your property. There are also many who still believe the new policy has only come into effect this year. In fact, the NSW government has backdated the policy to apply to purchases from November 11th, 2022.
This brings us to the question of whether annual land tax is a better choice for first home buyers in NSW when compared with stamp duty.
The answer is ultimately that it depends on the circumstances. There is a significant number of Australians who can afford the repayments of a home loan, but don’t have enough savings to cover the required minimum deposit and stamp duty. This will undoubtedly help those individuals get into the property market sooner.
Theo Chambers is the chief executive officer and co-founder of Sydney-based brokerage Shore Financial.
He has helped build Shore Financial into one of the leading independent brokerages in Australia, with the company coming fourth in The Adviser's Top 25 Brokerages 2023 ranking.
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