How to decide whether annual property tax NSW or stamp duty is best for you

First Home Buyers
Finance

19 January 2023

From 16 January 2023, first home owners buying a property worth up to $1.5 million (or vacant land valued at less than $800,000) will be able to choose between paying stamp duty (known in NSW as ‘transfer duty’) or an annual property tax NSW (often referred to as ‘land tax’).

Traditionally, stamp duty has been one of the unwelcome costs associated with buying a home. The NSW Government aims to help first home buyers by introducing the First Home Buyer Choice initiative. Click the link for full details on the scheme, including eligibility criteria and the terms and conditions: https://www.nsw.gov.au/initiative/first-home-buyer-choice

A reminder about stamp duty

Usually costing tens of thousands of dollars, this one-off levy can be prohibitive, especially for first home buyers who often struggle to save a deposit in these times of rapidly rising prices.

Stamp duty is a form of taxation that has been around since the 1600s in some parts of Europe. Many see it as an out-of-date levy that’s onerous for individuals, particularly those who want or need to move homes several times across their life (whether for work reasons or changing personal and family circumstances).

And, as it’s hard to predict how many people will buy and sell property each year, a property tax annual revenue is also an unpredictable revenue stream for governments.

The Grattan Institute puts it this way: “Stamp duty is a bad tax because it discourages home owners from moving house as their lives change, as doing so would mean having to pay stamp duty a second time.”

To learn more about stamp duty, see our guide here or talk to one of our team today.

Why might property tax be better than stamp duty?

Paying a smaller property bill each year, rather than a one-off bigger payment on buying a home, reduces the entry barrier to owning a home.

An annual property bill will usually sit in the low thousands of dollars. That’s far easier to budget and save for than an upfront cost of tens-of-thousands of dollars for stamp duty.

How will property tax be calculated?

Property tax is often referred to as ‘land tax’ because it’s based only on the value of the land a home sits on. This makes it a little harder to understand and estimate as, in general, most people are only aware of the cost of land when buying vacant land (one of the many benefits of a house and land package).

The formula for calculating property tax is:

Annual property tax = $400 + 0.3 percent of land value

The tax will be increased annually in line with inflation but this will be capped at 4 percent.

So, according to ABC News online, if a first home buyer - let’s call her Sarah - buys a $1.35m house with land value of $810,000 she can choose to pay either:

A. Stamp duty = $59,125 upfront
B. Property tax = $2,830 per year.

If Sarah lives in the home for less than 20 years before moving, she will be financially better off if she chooses the new property tax option.

Buyers of apartments will be even further ahead as the land value on apartments is generally significantly less than for a home of the same overall cost.

The NSW Government has introduced a calculator to help you compare the two options.

The calculator is only valid for properties costing more than $650,000 (as homes valued at less than this are stamp-duty free for first home buyers) and $1.5 million (as the property tax choice is only available up to this amount - if a first home buyer is buying a more expensive property, they have to pay stamp duty).

To use the calculator, you need to know the price of the home. You also need to know the property address. This is because the property tax is calculated according to land value rather than overall property price. Our team are also available to discuss this with you directly - talk to them today.

Why is the choice between stamp duty and property tax only available to first home buyers?

The NSW Government initially flagged the intention to make the choice between stamp duty and property tax available to a much larger segment of the population - up to 80 per cent of all home buyers.

While this may happen in time, offering the option to first home buyers is a way to trial the scheme while offering the choice initially to those most unduly affected by upfront stamp duty.

That’s a positive move as, according to NSW Government statistics, home ownership has declined from around 70 percent in the 1990s to less than 65 percent today, with younger people and those with a lower income finding it particularly hard to save enough deposit and other up-front costs.

What about other schemes for first home buyers?

Other first home owner schemes for those buying property in NSW will continue in addition to this new choice.

The First Home Buyer Assistance Scheme (FHBAS) offers no stamp duty (officially called ‘transfer duty’) for properties costing less than $650,000 (or land cheaper than $350,000) and concessions for homes up to $800,000 (or land costing up to $450,000).

There’s also the First Home Owners Grant (FHOG), offering $10,000 towards the cost of a newly built home worth less than $750,000.

Is the option of an annual property tax Australia-wide?

At present, NSW is the only state offering a choice between stamp duty and property tax for first home buyers.

The Australian Capital Territory (ACT) started phasing out stamp duty back in 2012, with the change happening over a 20-year period so that existing home owners will not be negatively affected.

It’s quite possible that, in time, other states will follow one or both of these examples.

How should I choose?

Choice is often billed as a positive but having options can be tricky, especially at a time when you are making so many other big decisions in terms of choosing and financing your new home.

So, if you are a first home buyer in NSW, here’s our guide to factors you should consider when deciding whether stamp duty or property tax is right for you:

Understand: Get to know the difference between the options of paying a one-off stamp duty or annual property tax. After reading this article, you can already put a tick against this first step (you’re welcome!).
Calculate: Use the NSW Government’s calculator to compare property tax costs versus stamp (or transfer) duty. You can use the calculator as many times as you want if you are looking at different properties or house-and-land packages.
Look ahead: We know you don’t have a crystal ball that shows you the future but consider whether your first house will likely be your forever home or whether you’ll move within ten or so years. The sooner you’re likely to move, the better financial sense choosing the annual property tax will be.
Current finances: If you have sufficient savings to pay stamp duty now as well as the deposit, you can consider this option. However, if you have a deposit but not enough savings for stamp duty, choosing the annual property tax option will allow you to get into your first home more quickly.

To help you see how these factors play out in different circumstances, see more examples, like that of Sarah above, at the NSW First Home Buyer Choice website.

The option to replace stamp duty with an annual property tax is the first major change to purchase-based taxation in a long time. Ultimately, this is good news for first home buyers like you!

If you’ve been inspired by what you’ve read to consider a house and land package as your first dream home, please talk to our team of friendly consultants on 1300 223 345 or email.

Frequently Asked Questions (FAQs)

How much is annual property tax NSW?

For first home buyers in NSW purchasing a home worth up to $1.5 million (or vacant land valued at up to $800,000), they have the option from January 2023 to pay an annual property tax instead of stamp duty.

How much is annual property tax in Australia?

Most bills for annual property tax will be in the low thousands.

How is property tax calculated in NSW?

The formula for calculating property tax in NSW is a set amount of $400 plus 0.3 percent of the value of the land the home is on.

How much land tax do you pay in NSW?

Often referred to as ‘land tax’, an annual property tax would incur around $2000 - $3000, instead of a once-off upfront stamp duty (or ‘transfer duty’) that usually costs in the tens of thousands of dollars.

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