NSW property tax: return of the living dead?

Article published 17 October 2022

NSW property tax: return of the living dead?

CPSA predicted that the NSW property tax was all but dead. The recent introduction into the NSW Parliament of the Property Tax (First Home Buyer Choice) Bill 2022 seems to suggest it isn’t.

However, on closer inspection it becomes clear that the NSW property tax’s state of health hasn’t changed much.

This is not because the NSW Government has changed its mind on the desirability of the wholesale replacement of property stamp duty with an annual property tax. If re-elected and if able to finance the radical change from stamp duty to a recurrent property tax, all indications are that the NSW Government doing it in a flash.

Leaving the outcome of the 2023 NSW election aside, what would stand in the way of replacing stamp duty with a property tax is the problem of how to finance the switch.

The average turn-over period for a residential property in NSW is 10.5 years. That is, on average there are 10.5 years between purchase and sale. So, conceptually an annual property tax would need to be roughly one-tenth of the applicable stamp duty to make sure homebuyers are not worse off, on average.

The NSW Government would collect in ten or eleven annual property tax instalments what it is accustomed to collect upfront in stamp duty. This in turn means that the NSW Government would have a significant annual revenue shortfall. In fact, the nine or ten annual property tax instalments previously collected as stamp duty upfront represent money the NSW Government would have to borrow for each and every property sold.

That was a problem even when the NSW Government launched its initial property tax proposal three years ago, when it could borrow money at a rate close to zero. Because we’re talking a lot of money here. It’s why it applied to the federal Government for financial assistance.

Now that interest rates are on a steady rise, having to borrow nine or ten annual property tax instalments is even more of a problem.

So, what about this Property Tax (First Home Buyer Choice) Bill 2022?

Doesn’t it introduce the very property tax CPSA said was all but dead?

No, for a number of reasons.

First, the property tax is aimed at first-home buyers only. No one else.

Second, even first-home buyers get the choice between stamp duty and an annual property tax.

Third, once they sell (in 10.5 years, on average), the next purchaser is not locked into an annual property tax and can opt to pay stamp duty.

As a result, there will be a relatively small number of properties which will become subject to property tax. The NSW Government estimates 6,500 properties annually.

The initial proposal a couple of years ago also provided for an option to pay stamp duty, but in that proposal once a property had changed hands and the purchaser had opted for property tax, there would have been no way back: the property would have been subject to property tax in perpetuity.

The effect of the property tax proposal as it now is that only first-home buyers who want to pay property tax rather than stamp duty will do so. No one else will need to be affected.

Effectively, the Property Tax (First Home Buyer Choice) Bill 2022 is a way of reducing the initial outlay on stamp duty by first-home buyers, supposedly making it easier for them to enter the housing market.

Arguably however, the NSW Government’s latest property tax proposal could turn out to be the thin end of the wedge. Once a property tax, even an insignificant one, is established, it will be easier to make it bigger in the future.

That would be a bad thing for a number of reasons.

In its worst form, an annual property tax means thousands of dollars in tax every year in perpetuity. It will double your council rates. If you can’t pay, it will be charged (plus compound interest) against your property.

It’s unlikely to happen but the NSW Parliament would be well-advised to simply nip the idea in the bud and vote down the Property Tax (First Home Buyer Choice) Bill 2022.

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