LAND tax, also known as property tax, and council rates are what economists call efficient taxes. You can’t escape them. Economists call stamp duty an inefficient tax because it stops many people from selling up and buying elsewhere to avoid paying it.
The NSW Government is therefore going ahead with an ambitious scheme to abolish stamp duty, replacing it with an annual property tax.
The NSW property tax will be on unimproved land value. The value of the buildings will be ignored because the Government believes that taxing people’s homes would discourage people from renovating their homes, which would reduce economic activity.
The new property tax will consist of a fixed amount (of $500) plus a rate (0.3 per cent of the unimproved land value as assessed by the NSW Valuer General). An average home in metropolitan NSW will cost $2,400 in land tax a year, an average regional home $1,800.
But there is a way to avoid this. If you already own your home and stay put, you won’t have to pay property tax.
If you sell up and buy elsewhere in NSW, then you have the choice between stamp duty or property tax. For example, the stamp duty on an average metropolitan house is close to $24,000. Compare this with an annual property tax of $2,400, and it it will be clear that if you are certain you are going to be living in the new place for more than ten years, you’ll be better off with stamp duty.
There is a catch, though.
Once a home has become subject to the property tax, subsequent owners must pay the property tax. This means that the choice between stamp duty and the property tax will disappear altogether, but this is likely to take more than twenty years.
A few things to keep in mind.
If you buy a new home, opt for property tax and invest some of the proceeds of the sale of your previous home in order to pay for property tax, you may find that your pension payments are reduced. Depending on your circumstances, that could be as much as $70 per fortnight.
Also, people of working age may find it hard to come up with the annual amount of property tax once they retire and their income drops.
For pensioner couples, be mindful of what happens when one of you passes and there’s only one person living in the home. Your household income from the pension drops from $37,000 to $24,500 a year. It would be very difficult for most people to pay an annual property tax on that kind of income.
The NSW property tax scheme will have hardship protections, whereby you rack up debt against your home, payable when the home changes ownership.
However, paying your property tax in that way, could make it very difficult to move. This is the reason why CPSA has always opposed such measures.