As part of yesterday's NSW State Budget, the NSW Treasurer announced that the Government is embarking on a public consultation process in relation to the reform of property taxes in NSW – specifically, replacing stamp duty and land tax with an annual property tax on an opt in basis. At the moment, this is a policy proposal only – there is no legislation available or confirmed commencement date. Public consultation will run to 15 March 2021 and information published by NSW Treasury indicates that following the consultation period, the policy will be developed in further detail and updates provided in the first half of 2021.
Key Features
Some key features of the policy include:
- Property tax will apply annually to commercial property, residential (owner occupier), residential (investment) and primary production land. Each category will have its own property tax rate and will be levied on the unimproved value of the land. Unlike the current land tax regime, existing exemptions for principal places of residence, lower value single holdings and primary production land will no longer apply. Bringing land that is currently exempt from land tax into the property tax regime will significantly broaden the tax base and, over time, act to replace the revenue lost from stamp duty. The potential property tax rates set out in the Government's consultation paper on an indicative basis are as follows:
| Property Type |
Potential property tax rate |
| Owner-occupied residential property |
$500 + 0.3% of unimproved land value
|
| Investment residential property |
$1,500 +1.0% of unimproved land value
|
| Primary production land (farmland) |
$0 + 0.3% of unimproved land value
|
| Commercial property |
$0 + 2.6% of unimproved land value
|
The proposed rates are higher than the current land tax rate.
- If you are not buying a property there will be no change. For purchases after the start date, buyers (subject to the transitional thresholds discussed below) will be able to opt-in to the property tax. That is, for eligible properties, buyers will have the choice of paying property tax rather than stamp duty. However, once a property has been opted-in, the property will remain subject to the property tax for all subsequent buyers of that property.
For commercial and investment properties, a buyer's choice is likely to be influenced by its holding strategy for the property and, for leased property, their ability to recover the property tax from tenants. In relation to the latter, the consultation paper indicates that the legislation would provide protections for tenants including, for example, proactive monitoring of the rental market or legislative provisions governing the pass through of the property tax. In the interim, landlords should consider whether any pass through clauses in their leases are flexible enough to capture the property tax or if amendments are required.
- In order to protect Government revenue in the short term, not all homes and commercial properties will be eligible to opt in to the property tax at the commencement of the regime. Under the current design proposal, about 80% of homes and 90% – 95% of non-residential transactions may be able to opt-in to the property tax at the outset. Whether a property can opt-in will depend on whether it has a market value which is below a determined threshold. Early signalling of the thresholds by Government (even on an indicative basis) would be worthwhile so that investment decisions are not delayed in the interim. It is likely that high value properties will not be included in the regime at the outset. It is clear from the consultation paper that the Government's intention is to allow the least expensive properties to transition first.
Treasury has published a consultation paper.
Hopefully, the consultation period will not only provide an opportunity for a discussion about the merits and design of the proposal but also how it will integrate into the broader stamp duty and land tax regimes. Among other things, the interaction with landholder duty, the future of the relatively recently introduced foreign purchaser and owner surcharges and impact on recently announced long term land tax concessions (for example the 20 year concession for eligible build to rent projects) need to be considered, as well as whether stamp duty will continue to apply to transactions that do not involve freehold land (for example, leases, fixtures and equipment fixed to land).
At this stage, no other State or Territory has announced similar proposals although the Australian Capital Territory is part way through a 20 year transition away from stamp duty. With budgets to be handed down in Victoria and Queensland in the next fortnight it will be interesting to see if they follow suit.
Authors: Costa Koutsis, Partner; and Barbara Phair, Partner.
