If implemented, New South Wales’ proposed stamp duty reform will undoubtedly bring about “broad and long-term ramifications” for home buyers, property investors and developers; according to one tax professional, the question then becomes – is this a good thing?

“Whilst on the face of it the proposal sounds promising as a means of reducing the existing barriers to homeownership and mobility of the workforce, it is too early to tell whether the positive aspects of the new system will outweigh the additional complexities it is likely to create for purchasers as well as the potential impact on the property market,” said Craig Whatman, tax partner at Pitcher Partners Melbourne firm.

As Whatman sees it, the complexity will be most acutely felt in the prolonged transitional period from how things stand now to the finalised reform.  

“Given the current estimate that it would take 20 years for 50% of all properties in NSW to become subject to the new system, the current stamp duty regime is still likely to be in place for quite some time,” Whatman said. 

“This means that there is likely to be two systems that need to operate in conjunction with each other for at least a few decades, with some properties being in the new system and others in the current system.”

Additionally, Whatman feels the suggestion that the changes will place downward pressure on house prices needs to be further explored; as he sees it, lower barriers to entry and “the ‘buy now, pay later’ nature” of the proposed annual property tax may ultimately do the opposite. 

“There is also a concern that the rate of the annual property tax could be increased over time, especially when the government needs more tax revenue, therefore creating uncertainty over property owners’ ongoing costs under the new system,” Whatman added.

Lastly, Whatman noted the indicative rates of the annual property tax put forward in the government’s consultation document indicate that the new system may be primarily targeted towards helping home buyers, as opposed to other types of property purchasers.

To illustrate his point, Whatman compared paying the existing transfer duty and land tax regimes with the proposed new annual property tax using the example of a commercial property acquired for $5 million and with the unimproved (or site) value of $3.5 million.

  • $260,005 – Stamp duty payable by the purchaser if they elect to pay duty
  • $44,356 – Annual land tax payable (based on current rates and value at purchase date)  
  • $91,000 – Annual property tax payable if the purchaser opts into the new system
  • $46,644 –  Increase in annual tax amount payable on the property under new system

“If the purchaser of this commercial property intended to retain it for more than 5.5 years, they would likely elect to pay the upfront stamp duty amount as opposed to the annual property tax,” Whatman explained.

“After 5.5 years, they would effectively ‘break-even’ if they elected to pay stamp duty and land tax under the existing regime, whereas opting in to the new regime would increase their overall tax liability concerning the property if they retained it for a longer period.”

Given there is a “reasonable chance” other states and territories follow New South Wales in reforming their own state tax regimes – particularly in respect to stamp duty, as Victoria has already done – Whatman feels strongly the proposed reform needs to be thoroughly modelled so its positive impact can be confirmed.