In late 2020, and in the 2021-22 Budget, the State Government proposed a reform which will replace the current requirement to pay stamp duty for property buyers with a new system. This system will offer buyers the choice between paying stamp duty (and any existing land tax, where applicable), and a smaller annual property tax when they purchase a property.
The Government has indicated that the reform is predominantly designed to address the current housing affordability crisis in NSW. It proposes that the removal of upfront costs on property sales and transfers will likely make home ownership more achievable for first home buyers. It also suggests that that the reform will further boost overall home ownership, enhance household mobility and stimulate economic recovery following the COVID-19 lockdowns.
On 11 June 2021, the Property Tax Progress Paper (Progress Paper) was released, which outlines key updates that have been made since the release of the initial consultation paper in November 2020.
What is the Annual Property Tax?
The property tax will be an annual tax that consists of a fixed amount, plus a rate, that is based on the unimproved land value of the individual property. Purchasers will be given the choice between paying the property tax or stamp duty at the time of purchase. However, once a purchaser has elected to pay the annual land tax on a property, the property will permanently enter the annual land tax system, which cannot be reversed by subsequent purchasers. The reform will not affect properties that are not bought or sold.
The Government has proposed the following rates which will apply to purchasers who opt for the property tax:
|Annual Ad Valorem Rate (based on unimproved land value)
|Surcharge on aggregate landholdings above $1.5 million of unimproved land (excluding principal place of residence and farmland)
It should be noted that these rates are subject to change as the proposal continues to develop.
How would the reform impact developers?
In their progress report, the Government indicated that various development industry bodies were engaged throughout the consultation process. These bodies expressed a range of benefits of the program, but also some concerns about some aspects of the reform which will need to be addressed prior to its implementation, which we outline below.
The Government has indicated that where a property is subdivided, each new property that is created as a result of the subdivision will remain in the same tax system as the property before the subdivision. This may raise several questions for developers. For example, can a developer still acquire multiple parcels of land for the purposes of development where some have been opted-in for the annual land tax while the others have not? Furthermore, which tax character will apply to the subdivided lots if the separate titles require amalgamation and subdivision? These are concerns which require clarification in order to ensure developers are aware of how the new system will operate in relation to various development projects.
Application of Different Rates
The Government has also indicated that developers, like other purchasers, will be provided with the choice to pay property tax or stamp duty, provided the land is not already subject to the property tax. Any properties that are being developed for residential use would be subject to commercial rates of the property tax. The lower residential rates would only be available when a property is capable of being used as a dwelling. Furthermore, a property that has been vacated for renovation purposes by an owner-occupier would continue to be treated as an owner-occupied dwelling, consistent with the principal place of residence land tax exemption which allows the continuation of the exemption in certain circumstances.
This suggests that if a developer opts-in to the property tax system when acquiring land for residential development, they will likely pay less than the stamp duty they would have been required to pay under the old system. However, developers who do opt-in to the property tax will have to market developed lots as having already been entered into the property tax system, thereby preventing any opportunity for the purchaser to remain in the old system. In contrast, a developer who elects to pay stamp duty on the property may end up paying more tax but will be able to offer purchasers the opportunity to choose between paying the property tax and remaining on the old system.
Increase in Demand for Apartments
The Government has also suggested that that the reform will be beneficial for developers of apartments. In the progress paper, the Urban Development Institute of Australia indicated that since the property tax will be calculated on the unimproved land value, and apartments naturally require less land than a house, purchasers of apartments will benefit from the reform by paying significantly less tax. As such, this is likely to increase the relative demand for apartments in NSW, providing significant opportunities for developers of apartments.
The State Government’s proposed reform will likely provide a range of benefits for developers, such as an increase in demand for apartments for purchasers and the opportunity to pay less tax overall. However, there are several remaining issues that need to be clarified in order to ensure that developers understand how the reform will operate and apply to their development projects, such as how the property tax will apply to subdivision.
Keystone Lawyers would be closely following this development for any further updates.