will-you-be-better-off-under-nsw-stamp-duty-reforms

Will you be better off under NSW stamp duty reforms?

REAL ESTATE FINANCE AND INVESTMENT ALERT

July 2021

Will you be better off under NSW stamp duty reforms?

As mentioned in our April 2021 Alert, in November 2020 the NSW Government issued a Consultation Paper, and subsequently received submissions, on a proposed new way of taxing property in NSW.

The Government released its Progress Paper last month in which it refines its initial proposals. The Paper raises some potential alarm bells in relation to how the proposed reform would work.

In this Alert, we highlight the following issues from the Progress Paper on which some of you may wish to lodge submissions to the Government. Submissions can be lodged up to 30 July 2021:

Increased property tax rates for residential investment property and introduction of a property tax surcharge on aggregate landholdings,
Uncertainty regarding existing exemptions for stamp duty and land tax,
Annual increases in the proposed property tax rates,
Foreign investors to be excluded from the opt-in regime,
Residential developments to be treated as commercial property and be subject to a higher property tax rate,
Buyers of off-plan or newly constructed residences may not have the benefit of the opt-in scheme,
Certain types of property to be excluded from the opt-in regime.
Uncertain tax consequences

The bottom line:

The proposed new property tax regime, although on its face a simple system, in fact, has a number of complex and potentially unacceptable consequences.
Property investors and developers need to understand what is proposed and ensure they raise their concerns with the Government while the opportunity to do so remains open.
I recommend you review the Progress Paper as soon as possible and provide your submissions before the 30 July 2021 cut-off.

Increased property tax rates for residential investment property and introduction of a property tax surcharge on aggregate landholdings

Increased rates

The Progress Paper proposes to increase the property tax on a residential investment property from $1500 plus 1.0% of its unimproved land value (ULV) to $1500 plus 1.1% of ULV.

Property tax surcharge

The Progress Paper also proposes to introduce a property tax surcharge of 0.3% on landowners with investment or commercial properties with an aggregate ULV of $1.5m or more. This surcharge will not apply to a person’s principal place of residence or farmland.

This structure is similar to the current land tax regime (and provides for a higher threshold than currently applies to land tax).

Uncertainty regarding existing exemptions for stamp duty and land tax

There are currently a number of concessions and exemptions applicable to stamp duty and land tax in NSW (including the land tax on Build-to-Rent projects). It is not clear whether such exemptions will also apply to the new property tax.

The Progress Paper proposes that:

Existing stamp duty and land tax exemptions will continue to apply to properties that are not opted-in to the property tax regime (i.e those in respect of which stamp duty was paid); and
In relation to properties acquired by buyers who opt-in to the property tax regime, certain exemptions will apply. The Government is still considering these exemptions. The Paper refers to the guiding principles it will use in finalising such exemptions (see page 39 of the paper)..

Clearly, this needs to be clarified as the imposition of any additional burden on investors/developers may not achieve the increase in housing affordability suggested by the reforms.

Annual increases in the proposed property tax rates

To provide certainty in relation to potential future increases in the property tax rate, the Progress Paper proposes that there will be an annual increase in the rate of the tax limited to the growth in the Gross State Product per capita and growth in land values.

Basis for increases

The proposed formulae for calculating such increases are specified in the Paper. There is a separate formula for calculating increases in the property tax surcharge mentioned above.

The growth in the Gross State Product per capita will be calculated each year by the Australian Bureau of Statistics. The growth in land values will be calculated each year by the NSW Chief Commissioner of Revenue for each category of property subject to the property tax.

Ongoing uncertainty

While the basis on which the increases would be calculated is more certain, the actual amount of the increases are not as they will depend on the growth rates included in the formulae. As payment of stamp duty is a once off cost (not subject to any future increases) this uncertainty may reduce the number of buyers willing to opt-in to the new property tax.

Foreign investors to be excluded from the opt-in regime

The Paper proposes that foreign purchasers of residential property will not be able to opt-in to the new property tax regime.

In addition, all foreign purchasers would continue to be subject to existing foreign purchaser stamp duty and land tax surcharges, even if they purchase a property that is in the property tax regime.

Although the Paper seems to say that a foreign purchaser would have to pay the property tax and the foreign purchaser's stamp duty and land tax surcharges, the basis on which the surcharges are to be calculated in that scenario is unclear.

This needs to be considered further as foreign developers, investors, and homebuyers are a very large part of our property market. Imposing any additional burdens on them may reduce the supply of new housing and adversely affect domestic developers who rely on foreign purchasers to achieve the required level of pre-sales for their projects.

Residential developments to be treated as commercial property and be subject to a higher property tax rate

Higher rate to initially apply

The paper proposes that where a development site is purchased for the purposes of developing residential property, the developer will have two choices.

These are to either pay stamp duty (provided no previous owner, including the vendor, had chosen to opt-in to the property tax regime when it purchased the land) or opt-in to the property tax regime. The property tax rate which will apply will be the higher rate applicable to commercial property (not that applicable to residential property).

Switch to a lower rate

The paper provides that when the property is capable of being used as a dwelling, the lower residential property tax rate will apply.

It is not clear when this change of rate is triggered. Can a completed apartment (intended to be sold) be regarded as being capable of used as a dwelling if the strata plan has not yet been registered?

This and other issues will need to be clarified.

Build to rent

The Paper deals with Build to Rent properties and provides that once the development is complete, and provided the developer chose to opt-in, the property tax will apply to each dwelling on the site.

It is unclear whether the rate payable on completion would be the lower residential investment rate or the higher commercial rate.

Buyers of off–the–plan or newly constructed residences may not have the benefit of the opt-in scheme

If the developer of an apartment building or other residential project chooses to op-in to the property tax regime, it appears that the buyers of the apartments or other developed dwellings would not have the choice of paying stamp duty.

This may not suit all buyers and may work against the developer in achieving sufficient pre-sales for the project.

Certain types of property to be excluded from the opt-in regime.

The Paper provides that the Government may limit the availability of the new opt-in regime by including zero thresholds for different types of property thereby precluding buyers of such properties from being able to opt-in.

This is a fiscal measure to limit the application of the new regime to properties with an ULV below specified thresholds.

Uncertain tax consequences

The initial Consultation Paper, as well as the Progress Paper, assumes that the property tax will be tax-deductible for residential investors and commercial property buyers.

While land tax is generally tax-deductible for the above purchasers, stamp duty is not (but is rather added to the cost base of the property). As the property tax is in lieu of both land tax and stamp duty it is not clear whether it will be fully tax-deductible.

TIMING UPDATE

According to the AFR on 5 July 2021, the NSW Treasurer has indicated the new property tax regime is not likely to be implemented until after the next State election due in 2023. Hopefully, this will give all stakeholders the opportunity to comment on the proposals so that when implemented, the issues identified in this Alert and others are dealt with for the benefit of all concerned.

Please feel free to contact me to have a complimentary 20-minute discussion to see how these matters may affect you and your current and future projects.

Peter

Author of “The Ultimate Short Guide to Property and Development finance in Australia. There is much more to it than numbers”

Peter Faludi Consulting

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The comments made in this Alert do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.

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