NSW Budget launches massive stamp duty reform

Late last year, NSW Treasurer Dominic Perrottet flagged that he was looking at eliminating inefficient state taxes like stamp duties, to spur growth.

Yesterday he put rhetoric into action, launching a reform that would offer owner-occupiers an alternative to stamp duty via a fixed $500 up-front fee plus an annual tax of 0.3% on unimproved land value. For the average property in NSW, that would equate to around $1,600 in tax annually. But buyers would still have the option of paying stamp duty upfront as a lump sum (currently averaging $34,000).

However, once a property is subject to that annual tax, all future owners must continue to pay it.

The NSW Government will now undertake community consultation until March to seek feedback on the plan.

Prosper Australia, which has been lobbying for land taxes for more than 100 years, has backed the proposal, declaring it a “generational reform”:

This may well be the most important balloon ever floated! Yesterday’s NSW state budget saw Treasurer Dominic Perrotet lean in on the pandemic to usher in generational reform. He boldly opened up to public feedback on the slated proposal to replace stamp duties with a broad-based land tax. The touted tax schedule is proposed as:

Current land tax rates apply only to investors in commercial and residential:

  • Threshold one: $734,000 – $2m: $100 plus 1.6 per cent of land value above the threshold.
  • Premium threshold: $60,164 plus two per cent of land value above the $4,616,000 threshold.

Property investors will likely have their taxes cut by at least 40% whilst future generations will be saddled with higher public debt. Home buyers are likely to pay less to banks in mortgage interest (reduced stamp duty) while everyone will find it easier to upsize, down size and move closer to work. The financial savings to home buyers may be cancelled out by the higher capitalisation rate – with lower overall property taxes allowing for greater upfront bids. That’s what we have learnt in the ACT.

Supporters can ‘Have their Say’ on the proposed changes by completing this NSW Treasury survey. Your time is now! Read their short discussion paper first. Treasury’s quick poll is currently showing a 70-30 support for the reform.

The Treasurer demonstrates some clever politiking by excluding the wealthiest from the transition. The top 20% of high value properties will not be able to transition, meaning that government receives their large stamp duty payments alongside quietening these typically loud voices. Perrottet is clearly playing to first home buyers, struggling to achieve their ever growing deposit requirements.

This reform is certainly a step in the right direction. We just hope that a 0.3% charge on home owners and a 1% charge on investors will be significant enough to encourage a more appropriate allocation of housing. Lead Second Interval author Warwick Smith is quoted in the AFR recognising investors will be the quickest to respond…

When it comes to inefficiency, you would be hard pressed to find a worst tax than stamp duty on property.

Victoria University recently ranked it as the most inefficient tax:

As did discussion paper on tax:

ScreenHunter_6774 Mar. 30 10.24

At the other end of the efficiency spectrum is land taxes, which are highly efficient.

Stamp duties are also linked to the number of property transaction and, therefore, are inherently volatile:

Moreover, because only between 4% and 8% of the housing stock is transacted annually, we have a bizarre situation where a small minority of the population are paying taxes that support services for the whole community – all for the privilege of moving to a home that better suits their needs!

Clearly, there are strong efficiency arguments in shifting from stamp duties to land taxes.

You’ve gotta commend Dominic Perrottet for embarking on such an ambitious reform.

Unconventional Economist
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Comments

    • Prices might go up in short term – as folks see their “ability” to pay go higher – but that should (haha should!) be offset by banks taking into account ongoing land tax into the serviceability of a mortgage. So I guess you are right – PRICES UP!!

    • Strange EconomicsMEMBER

      4.5 % t stamp duty over 300k in NSW. %% over 1 million
      Excluding inflation effects, thats 15 years at 0.3 %.
      Despite people saying they buy forever, typically owners trade houses every 7 years – bigger house, smaller house, move…
      So taking the yearly fee is a no brainer.

      Now 1% for investors – only for the flippers who have watched too many episodes of the block.
      This is where the lobbying against it will start.
      3 month consultation ? Lobbyists get down to Macquarie st now !

  1. What does this do to sales volumes in the short term?

    Longer term I think this is beneficial for the VOLUME of transactions (no comment re prices) so a net positive for BRICK PIMPS (aka Real Estate agents).

    • Agree, it is going to encourage more transactions over the long term. However we really need to imposed on the oldies currently in their houses (but who otherwise have no intention of selling). It needs to operate to motivate people to sell when their housing no longer suits their needs.

      • I think this is more a behavioural economics point – I mean this is the same point as now – don’t sell and you don’t have to pay Stamp Duty / Sell and pay it. It might impact some older / boomer types who don’t necessarily act rationally in any case. Those types (like some Boomers I know who I call Mum and Dad) have always planned to leave their house only in a wooden box … so them continuing to choose not to sell doesn’t impact it. The positive is instead of paying X years worth of land tax they could swap and pay a much smaller amount than Stamp Duty.

        • On the flip side, having just paid $35k in stamp duty I am incentivised to never move at all – or at least, hang in there as long as possible, because the moment I do, I start paying land tax. By staying put, I pay nothing. Or do I have this all wrong?

          • I’m with you, I paid $53k in duty this year. So I never want to move again. So I never have to pay an annual rate. If they credit me back $53k I will be happy to rate the annual rate. Since that $53k would wipe out over 1/3 of my current mortgage. 🙂

      • That’s a great idea! Starve those useless oldies out of their homes that they slaved for decades to pay off and make them move away from their families and friends.

    • Exactly. I paid land taxes and only a small stamp duty when I bought a home in California. The land taxes were onerous. Here, stamp duty actually works out much cheaper than land tax if you live in your home for more than a decade. After a decade, the land taxes are a wash with stamp duty, and from then on you bleed. After ~2 decades with land tax, you end up paying 2x stamp duty, and so on.

        • All those folks with huge houses out my way (Park Orchards or Wonga Park areas) will be paying huge land tax bills I’d say.. might create more demand for houses under certain price points.

          • Just because the property is large, doesn’t mean the land value is large. So “huge” might be overstating it. You can actually find out the rateable value of any parcel of land on the valuer general site.

            But yes, unit owners will get a better deal under the change.

    • Very good article. Especially the section on stamp duty being a stabilising tax.

      House prices naturally rise and fall.. large transaction costs act as an effective barrier in stopping many from dumping their houses as prices start to fall.

      With low transaction costs, how many more houses would likely have hit the market during this recent pandemic?
      Most pundits were projecting a 10 to 20% house price fall with – comparatively to a low transaction cost environment – relatively restrained numbers hitting the market.

      If I could project my house would fall 20% in value, why wouldn’t I sell and dip into the rental market to buy back later at a 20% discount?

      Every economic downturn would see a massive run to the exits.. and housing would become much more like the stock market, with very wild swings and variable volumes.

      It is out and out, from every perspective a very bad idea.
      Yes, every dumb idea has very good reasons to pursue it, IF all the negative consequences are ignored.
      So too with the suggested tax changes.

      • Sure, but as I mentioned above, if I’ve just recently dropped $35k on stamp duty, I have zero incentive to move anywhere else as I’d then be paying an annual land tax instead. At the very least I would want to fully amortise the stamp duty cost before considering switching to a land tax arrangement.

  2. run to the hillsMEMBER

    I paid $33,000 in NSW stamp duty YESTERDAY, then read about this new government policy that afternoon, just my luck that I’ll probably end up worse off with the new policy.

    • One of the discussion points is about whether recent purchasers should get a retrospective choice. You should log on to the feedback website and tell your story and say you will support the change if you get a choice retrospectively.

    • From my read you get to choose if you pay the land tax when you move again …

      If you stay put for 7 years (which to be honest is the break even time for staying in a place anyways and what you should have been planning for) then you get to live there TAX FREE!!

    • My older son has been looking to buy a house and was complaining about stamp duty. I told him that there was talk (before this proposal) of giving people a choice between stamp duty and land tax. He then said that he would take the stamp duty, even if it appeared that the land tax was a better deal. Do you really want to bet that the government won’t raise the rate in the future or that you will never fall on hard times and be unable to pay it? Currently, the NSW government charges 8.89% interest on unpaid land tax.

  3. Excluding the 20% most expensive properties from the ability to choose, at least in the first phase, needs some further investigation. The most expensive 20% of properties in NSW probably covers half of the detached houses in Sydney (maybe someone with access to CoreLogic data can confirm). That’s a pretty big exclusion.

    • I’d just like them to put a DOLLAR value on what the top 20% is. Is it $3M? Is it $5M? This will basically just exclude some suburbs – I’d like to know how I am impacted (Paddington NSW – median house price $2.5M).

      • Exactly. They obviously know the answer but haven’t put it down anywhere. I just don’t have access to the data to work out what it is. But I reckon low $2s is going to be about right.

  4. Oi Leith, you’d better get on to your mate Michael Mclaren to help explain this. I’ve been listening to 2GB this morning and as expected, there is a lot of pushback on this.

    • Do the sums before you make your choice. It might make more sense to use the stamp duty to make a super contribution.

      Also, because Land Tax is based on unimproved land value rather than market value of the property, units will get a better deal under the changes.

  5. happy valleyMEMBER

    “You’ve gotta commend Dominic Perrottet for embarking on such an ambitious reform.”

    I’ll commend pretty boy Dominic when we’ve got to the bottom of the $4bn (?) blackhole in iCare.

  6. Great initiative to replace stamp duty with land tax.
    But am I the only one who sees an administrative nightmare from having 2 classes of property – those which continue to pay stamp duty vs. those who pay the land tax? You can just imagine some groups of people (e.g. people looking to buy a home for 10+ years) preferring properties that haven’t opted into land-tax – therefore if you do opt-in will your property value decrease…? Would have been much simpler to make the transition in one fell swoop

  7. There is nothing closer to slavery than having to pay the government $20,000+ per year.. because this is where these taxes will end up after numerous increases eventually.. to live in a home you own.

    There will be next to zero upfront saving on a home as house prices already transact at the clearing rate, inclusive of tax, remove the tax, the clearing rate price will not have changed, or have changed very little, and more money will go to the existing capital holder.

    It is a w in for the super rich then, and the impoverishment of everyone else.
    The best thing that can be said of the modern capitalist system, is that it allows one to ‘opt out’ if one can gather a reasonable sum of wealth. So that one can be one’s own master, live on their own land, grow their own food, not forced into the system with others without consent for the duration of one’s whole life.

    Forcing a man to keep working to meet excessive annual costs, or lose his home, is slavery.
    (Here forget current persons who may be exempt, think to the future).
    We should have none of it.

    People should realise by now, the need to keep fix, fix, fixing everything, and making changes does not tend to benefit us little folk.
    Number one – we are not in charge, not requesting the changes, and not in charge of what they will be or implementing them.
    As such they are implemented by people that are not us, and you believe they are for our benefit?
    They are not!

    Has the raft of education changes over the last 3 decades improved the education of the average kid?
    Our results say not.
    Our current system of housing taxation is not broken.
    It is conducive to keeping housing wealth within families, and not subject to undue pressure to sell.
    The VULTURES want more access.
    Don’t give it to them.

    • In a free, capitalist society you should be able to own land outright — as in, buy it and have no 3rd party claims on it (aside from any borrowings). As it stands, a land tax means this is not possible. Rates are not optional either.

    • Why is there this assumption that the rate will inevitably increase? It hasn’t done so for stamp duty in a couple of decades (and only then to put higher rates at higher thresholds).

      To pay $20,000 a year for your own place, your assessed land value would be $6.5m at the proposed rates. That’s equivalent to an overall market value of the property of about $15-$20m. It’s a rounding error if you have that amount of wealth.

      By the way, at the same time, the NSW government is reducing payroll tax rates.

    • Sorry but I agree with Leeroy, by all means double the tax paid by foreigners owning land here or investors, but not home owners and those with only 1 PPOR.

  8. There’s some elements of this I don’t like – the top 20% exemption, the embedded first home buyer grant, the ability for boomers to ride out their current properties on stamp duty paid – but it’s a massive step in the right direction and I’ve just strongly supported it on https://www.haveyoursay.nsw.gov.au/nsw-property-tax-proposal

    It will take a while, but this could/should be the death knell for stamp duties to the benefit of us all. NSW will start seeing the benefit and other states will need to follow to keep pace. The state government no longer having to fund procyclical revenue drops is a big win for good governance and fiscal management. Personally, I will likely change house every 7 or so years for the rest of my life and will definitely do so under this reform.

  9. Gradually properties tied to land tax will dominate. It’s an easy bait investors will take it. As Mollison said, give an Amazonian Pygmy a Te shirt and chainsaw and he will clear it for you. People generally don’t think ahead or see the big picture. . the tax goes up year in year out as house prices and inflation continues. The Roman Empires great creation was taxing Homes so eventually people carried their possessions and left. Govt voted down Paulines effort to save us from Schwab communism, by 2030 you will own nothing and be happy he ses and this is a sweet step in that direction. I loathe that Catherine Passmore based on multiple observations.

  10. Arthur Schopenhauer

    Goodbye big houses in leafy suburbs.

    This tax advantages investors and developers, and disadvantages those who want to stay in a house long term.

    It also promotes smaller block sizes.

    It will result in the deforestation of our cities and rapid densification, if implemented.

    • “Goodbye big houses in leafy suburbs.”

      Those have been excluded under the 80% threshold. Which means that the government thinks that people in those houses are more likely to turn over their properties more frequently than every 10 years or so.

    • Firstly, it’s quite clear from current shrinking block sizes (down to ~400m^2 or less here in SE QLD, even out in the middle of fvcking nowhere) that nothing in the stamp duty regime prevents or discourages it.

      Secondly, it’s not hard to find places with land taxes and large blocks.

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