Stamp duty vs. land tax: which one would cost you more?


The NSW government's plan to abolish stamp duty in favour of a broad-based land tax is a bid to remove one of the major hurdles people face if they want to move homes.

Under the proposed changes, announced as a part of the state budget, home buyers would be given the option of paying an upfront stamp duty on purchase or paying an ongoing land tax.

But even though stamp duty has been in place in some form since 1865, it is still believed to be a highly inefficient form of tax that discourages many people from moving.

stamp duty v land tax nsw

An example would be downsizers, who are now at retirement age and living in a large family home and would like to move to a smaller, more manageable property. They are often hamstrung because of the large transaction costs.

With a median house price of more than $1 million in Sydney, stamp duty is around $40,000 on a $1 million purchase.

At this stage, the government proposes that owner-occupiers, investors, and owners of commercial properties would face different levels of land tax, which poses an interesting question for property investors and what it might mean for house prices.

Investors could lose out 

Looking at the numbers, on the surface, it appears that investors who buy large family homes could be losers under a land tax.

Based on the initial figures outlined by the government late last year, they would be forced to pay $1500 plus 1% of the land value each year. And based on this information, for metropolitan NSW the average residential land value is around $630,400 and the corresponding owner-occupied property tax would be $2391.

By contrast, an investor would pay $7804 a year for that same property.

Given the high prices and the already low yields in Sydney, it makes the prospect of owning property as an investor far less appealing over the long term.

Typically, if investors are priced out of houses, they look to units, but under the proposed changes there could be little difference.

For apartments, it looks as if the net result might be about the same or slightly better, given the smaller land component.

It seems the government will allow people to opt in if they buy between now and when new changes come through. However, on the surface, it looks as if investors will pay more in the future and once a property has opted into the new scheme it will remain that way going forward.

Owner-occupiers hit too

Similarly, for owner-occupiers who are looking at a home for the long term, it appears that a land tax would be detrimental compared with paying stamp duty upfront.

House price values may also be impacted if people hold off buying a property in the hope of qualifying for any changes should they come about.

We do, however, expect the government to backdate any changes or offer rebates, so this strategy is not advised.

A number of economists have also predicted that in the short term prices might rise as the money saved on stamp duty could go towards the purchase and drive up demand.

With a longer-term view in mind, however, the belief is that a land tax makes property more efficient, so there could be an increased supply of larger homes. Generally a sought-after commodity, they could fall in value and become more affordable.

The government is taking a voluntary approach to rolling out the scheme, giving homeowners the opportunity to choose between the upfront stamp duty or the land tax.

The opt-in capability of the scheme is appealing, but it is important to remember once a buyer has opted in, future buyers of that property won't be able to opt-out and they will pay land tax instead of stamp duty.

In NSW, on average about 5% of properties change hands each year, so on average each is transferred once every 20 years.

If in the first year all buyers switch to land tax, the government will lose 95% of the money it would have received from stamp duty in that year.

Ray Ellis, CEO of First National Real Estate, expects a two-tier market to emerge. He says the proposal could introduce complications that make some properties less saleable than others.

"If a buyer elects to pay an annual property tax instead of one-off stamp duty, all subsequent purchasers of the property will be forced to pay annual land tax," he says.

"This would have the potential to make properties locked into an annual tax regime less attractive to downsizers and buyers with the capital and intention to stay for the long term."

State of the nation

NSW residents do not currently pay land tax on their principal place of residence, on land used for primary production or on land valued below $755,000.

It is paid on any vacant land, including vacant rural land, land where a house, residential unit or flat has been built, holiday homes, investment properties, company title units, residential, commercial and industrial units, car spaces, commercial properties including factories, shops and warehouses as well as land leased from state or local government. For 2021, land tax is 1.6% above the $755,000 threshold and 2% above the "premium" threshold  of $4,616,000.

The Northern Territory is the only state or territory with no land tax. However, for a purchase between $525,001 and $3 million, the stamp duty is 4.95% of the property value.

While the ACT has generous concessions, its land tax rate is 1.12%. It also recently abolished stamp duty for first home buyers and commercial property under $1.5 million.

Tasmania has a maximum land tax rate of 1.5% and if you were to buy a $400,000 home you would be up for $13,997 in stamp duty.

Victoria's land tax is 2.25%. The state government recently announced land tax waivers up to 50% for purchases of property up to $1 million. Currently land tax starts at 1.4% for properties valued at $25,000 or less and rises to 5.5% for those valued at or above $960,000.

In South Australia, the land tax is 2.4%. Stamp duty is based on a sliding scale, ranging up to $21,330 plus $5.50 for every $100 over $500,000.

In Western Australia the land tax is 2.67%. Generally, for a residential property valued between $360,001 and $725,000 the stamp duty is $11,175 plus 4.75% for every dollar over $360,000. 
Queensland has Australia's highest general land tax rate at 2.75%. It has a general rate of stamp duty for those purchasing an investment and a concessional rate for those purchasing a home.

The concessional rate is $10,150 plus $4.50 for every $100 or part of $100 over $540,000 for homeowners purchasing a home between the value of $540,001 to $1 million. This is less compared with the general rate of $17,325 plus $4.50 for every $100 or part of $100 over $540,000.

While land tax thresholds are redetermined each year, rising property values have meant that some property owners have been pushed over the threshold without even realising it in years gone by.

With Victoria and NSW changing their stamp duty regulations, the other states could soon follow.

Two-speed approach

The Real Estate Institute of Australia has already called for a co-ordinated approach that could see knock-on benefits to the economy as a whole.

Steve Mickenbecker, group executive of financial services at Canstar, says land tax is less likely to distort householders' choice of property, whereas stamp duty is seen as a barrier to getting onto the property ladder.

Tim McKibbin, chief executive of the Real Estate Institute of NSW, says the reform has the potential to adversely affect the housing market for months, but this won't occur until mid-2021 at the earliest.

The Real Estate Institute of Western Australia recommends a two-stream revenue collection approach. The president, Damian Collins, says this would allow buyers to decide whether to pay the stamp duty upfront or whether to opt in for an annual fee for the duration of ownership. A reduction in upfront costs could encourage more transactions with a significant flow-on benefit to economic activity, similar to the proposed change in NSW.

The REIWA is calling for a $10,000 stamp duty concession for seniors over the age of 65 to encourage appropriate "rightsizing".

But the question remains: who might prefer stamp duty and who might prefer land tax?

For those planning to hold a property for a long time, paying a one-off stamp duty would be more appealing. This removes the annual land tax burden.

In NSW, the average stamp duty is $26,000, which increases for more expensive properties. In a good year, with around 200,000 transactions, the revenue exceeds $9 billion.

Yet from the initial announcement, the NSW Treasurer has indicated young property buyers will opt for the land tax scheme, deeming it "the Netflix of property tax".

However, most investors seem to be still unsure about the changes.

From our initial conversations and impressions, many see the choice as a positive, and with affordability being a large stumbling block for those entering the market, the land tax option seems appealing.

But we are yet to see how banks treat each scenario in their servicing calculations and how this will affect overall borrowing capacity. This will also be a major factor.

There is no doubt there is potential for the reform to make it a better proposition to buy an investment property in NSW. The initiative is clearly focused on reducing transaction costs, which is always a positive for investors.

It's likely the NSW government's consultation paper will be backed up by some further policy detail, which in the overall context of current market conditions will be positive for investors.

Get stories like this in our newsletters.

Related Stories

Peter is the co-Founder of Wealthi, a real estate investment platform backed by Pi Labs VC in London. He previously worked with NASDAQ listed Morningstar Inc and Tokyo listed Invast Securities. Peter completed his Bachelor of Commerce at the University of Sydney before completing post-graduate studies in financial analysis at the University of New South Wales. He has almost two decades of experience working in the wealth management.
gabrielle Fenoglio
February 18, 2021 8.19am

if a two tier method is adopted what happens to capital gains tax when an owner/occupier sells and when an investor selks?