NSW stamp duty reforms – Boom and gloom

NSW stamp duty reforms – Boom and gloom

REAL ESTATE FINANCE AND INVESTMENT ALERT

April 2021

NSW stamp duty reforms – Boom and gloom

As you are aware, in November 2020 the NSW Government issued a Consultation Paper, and subsequently received submissions, on a new way of taxing property in NSW.

While conceptually the ability to avoid large lump sums of transfer duty each time a person buys a property is attractive, the proposed reforms raise more questions than answers.

The examples given by the Government as to how the new regime would work are simplistic and do not address a number of significant issues buyers and owners of property will face due to the reforms.

In this Alert, we discuss the following issues which in our view should be addressed before the reform can have any widespread positive outcome for property buyers:

  • The complexity of a multi-tier tax regime,
  • The lack of flexibility in deciding which tax mechanism (upfront or ongoing) a buyer can use,
  • The uncertainty as to whether any limits will apply to future increases in the property tax rate and the thresholds which will apply to such rates, and
  • The lack of other options.

The bottom line:

Developers of lower-priced housing, as well as their buyers, will be the primary beneficiaries of the proposed new tax system. Buyers of higher-end residential property and commercial property are likely to miss out on the benefits of the new system.

There appears to be no proposed timeframe by which these reforms are to be introduced. As a result, property buyers and investors will have to live with the current laws or defer their decisions to buy until the reforms are clarified and the timetable for introduction is known.

Having taken the initiative to propose reforms to a universally disliked tax, the NSW Government should consider all issues raised and put forward the proposed timetable for the introduction of the new laws as soon as possible.

The complexity of a multi-tiered tax regime

Matters to be considered by buyers

As currently proposed, if the reforms are adopted, NSW will have a multi-tiered property tax system. Property buyers and owners would have to consider:

  1. If the property they are intending to buy can benefit from the new regime (as their will initially be price thresholds above which the new regime will not apply),
  2. Whether:
  3. paying the current upfront transfer duty based on the improved value of the property together with an annual land tax (if applicable) based on unimproved land value, or
  4. opting into an annual property tax based on the unimproved land value of the property, which would be in substitution for both transfer duty and land tax,

is better for them financially,

  1. How the new regime applies to the structure of their proposed acquisition, e.g if a buyer is buying the entity which owns the land rather than the land itself, and
  2. Whether any existing exemptions relating to transfer duty or land tax will apply.

Thresholds

It appears that the reform will not apply across all property types. To protect government revenue, the Government’s Consultation Paper indicates that thresholds are likely to apply resulting in properties with a higher unimproved value not being able to opt-in to the new regime.

Differing tax rates

The rates of the annual property tax differ between property types. For example, the rate will be higher for investment and commercial property than for owner-occupied residential property.

Due to the proposed perpetual consequence of their decision as to the matters in point 2 above, buyers should consider the impact of their choice on future buyers. The choice of property tax to apply to a property may impact a buyer’s ability to raise finance and their current and future cash flow.

In our view, simplification of the property tax regime is an important consideration for the proposed reforms and other alternatives should be considered when finalising them.

The lack of flexibility in deciding which tax mechanism (upfront or ongoing) a buyer can use

The reforms currently only allow the first buyer of a property, after the reforms become law, to choose whether to pay the lump sum transfer duty or to opt into the proposed new annual property tax regime. If a decision is made to opt into the annual tax regime, each subsequent buyer of the property will be bound by that decision. They will have no option to pay lump-sum transfer duty on the acquisition of the property.

While the Government acknowledges that buyers have different objectives and goals in relation to their property acquisitions, it has only provided flexibility to the first buyers of the property after the law changes. Subsequent buyers will have no such flexibility where the vendor has previously opted into the annual tax regime.

This may not suit all buyers (especially those who intend to hold property for the long term). The level of buyer interest in properties subject to the annual tax may be less than would be the case if subsequent buyers had a similar choice.

For example, the Government’s Consultation Paper proposes an annual property tax for commercial property to be 2.6% of the unimproved value of the property. If a vendor (who did not intend to hold the property for an extended period), chose to opt-in to the annual property tax, a buyer with a long-term objective would be paying 2.6% of the unimproved value throughout the duration of its ownership. Although this may be tax-deductible, it may still not be acceptable.

If this type of scenario results in fewer people switching to the new regime, the reform may not achieve its objective of relieving the current stamp duty burden of buyers.

Tax reform should ideally be neutral or favourable to the market. Allowing all buyers to have the same choice between a once only lump-sum transfer duty or an annual property tax would achieve this.

The uncertainty as to whether any limits will apply to future changes in the annual property tax rate and the thresholds which will apply to such rates.

As Government finances and agenda’s change, there is always a risk that taxes or tax rates may also change.

With lump-sum transfer duty, once paid it is no longer a tax which the buyer has to consider. The proposed property tax, being annual and perpetual (if an earlier buyer opts-in to that system), leaves itself open to increases if the Government needs to bolster its finances in the future.

Further uncertainty will arise from potential changes to the monetary threshold above which the annual property tax will not apply as well as changes to the valuation methods to be used in determining the unimproved land value on which the annual tax is calculated.

The lack of other options.

The Consultation Paper does not put forward other options to ease the burden of the current stamp duty regime.

Commentators have touched on other possible alternatives, including retaining the current regime but allowing the duty to be paid by installments over a period of years.

Hopefully, such options (and others) will be considered before any final proposals are submitted for approval by NSW Parliament.

 

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

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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