Buying a home is an important step for many people preparing to settle in Australia. Recently, with the release of the NSW state budget, a major property market announcement has caught widespread attention. Last Tuesday (21 June), the New South Wales Government introduced the First Home Buyer Choice property market reform targeted at first home buyers. Eligible first home buyers will no longer be required to pay stamp duty as a lump sum, and can instead choose to pay an annual property tax.

This article breaks down the new policy: what are the benefits? Do you meet the eligibility criteria? How is the tax rate calculated? Plus other key considerations.

Policy Overview

Under the new policy: first home buyers purchasing a property valued at AUD 1.5 million or less will be able to choose between paying an Annual Property Tax or paying Stamp Duty. The property tax applies to first home buyers who elect to pay an annual property tax.

The government plans to introduce the property tax legislation to the New South Wales Parliament in the second half of 2022.

From 16 January 2023 onwards, eligible first home buyers who sign a purchase contract will be entitled to opt into the property tax and complete the property transaction without paying stamp duty.

Between the passage of the legislation and 15 January 2023, eligible first home buyers who sign a purchase contract will also be entitled to opt into the property tax. However, these buyers will need to pay any applicable stamp duty within the usual required period, but from 16 January 2023 they will be able to apply for and receive a refund of that stamp duty.

Once the legislation is enacted, information on how to apply for the property tax will be announced.

What Are the Benefits of the New Policy?

For a long time, many people buying property in Australia have had to pay a substantial amount of stamp duty. The introduction of this property tax for the first time in NSW means that first home buyers now have more choice, and can pay the property tax in lieu of stamp duty.

The new policy will reduce the upfront costs of buying a home and help lift home ownership rates in New South Wales. As property prices have risen, the home ownership rate has fallen from around 70% in the 1990s to around 64% today. The decline in home ownership among younger people and lower-income groups has been particularly pronounced, so the new policy will remove some of the barriers to home ownership for these groups, helping more people purchase property within a shorter timeframe. Overall, these measures will support roughly 97% of first home buyers — about 55,000 people each year.

Existing stamp duty concessions for first home buyers apply to properties valued up to AUD 800,000, and these concessions will continue.

Who Qualifies Under the New Policy?

The buyer must be an individual (not a company or trust);

The buyer must be at least 18 years of age;

The buyer, or at least one of the people buying the property with them, must be an Australian citizen or PR;

The buyer or the buyer’s spouse must not have previously owned or co-owned residential property in Australia, and must not have previously received the First Home Buyer Grant or duty concessions;

The value of the property purchased must be less than or equal to AUD 1.5 million;

The buyer must move into the property within 12 months of purchase and live there continuously for at least 6 months;

The buyer must sign the purchase contract on or after the scheme’s commencement date.

Should You Choose Property Tax or Stamp Duty?

If you meet the above criteria, you will have two options when buying:

1. Pay the usual amount of stamp duty based on the “dutiable value” of your property (Stamp Duty).

Paying the usual amount of stamp duty based on the ‘dutiable value’ of your property.

2. Pay an Annual Property Tax based on the unimproved land value of the property.

Paying an annual property tax based on the unimproved land value of the property.

A few points to keep in mind to help you make the right choice:

The existing stamp duty concession policy for first home buyers has not changed. First home buyers purchasing a property valued under AUD 650,000 will still be able to apply for a full stamp duty exemption.

Properties purchased between AUD 650,000 and AUD 800,000 will continue to receive a stamp duty concession.

For properties priced above AUD 800,000, no first home buyer stamp duty concession is available.

If a first home buyer does not qualify for the exemption or concession, stamp duty is payable at the standard rate.

First home buyers purchasing a property valued at AUD 1.5 million or less will be able to choose between paying the annual property tax or stamp duty. The annual property tax will be based on the land value of the property purchased. For the 2022–2023 year, the property tax rates are:

$400 + 0.3% of the land value of an owner-occupied property

$1,500 + 1.1% of the land value of an investment property.

Note: these rates will be indexed annually so that average property tax payments remain proportional to average incomes.

Worked Examples

Example 1:

Ms A and her spouse are buying their first home, valued at AUD 650,000, with a land value of AUD 340,000.

Normally, the stamp duty on a AUD 650,000 property would be AUD 24,555, but because they are first home buyers they are exempt from stamp duty, so there is no need to opt for the property tax. For 2022–2023, the annual property tax on this property would be AUD 1,420.

Example 2:

Mr C is buying his first home, an apartment valued at AUD 750,000. The land value of the apartment is AUD 270,000.

As an eligible first home buyer, Mr C qualifies for the concessional stamp duty rate, which in this case is AUD 20,870. For 2022–2023, the annual property tax on this apartment would be AUD 1,210. Mr C plans to upgrade to a larger home in about five years, so opting for the property tax will work out more cost-effective, and he chooses the property tax.

Example 3:

Ms L is buying her first home, a townhouse valued at AUD 1.2 million. The property’s land value is AUD 720,000.

Stamp duty on this purchase would be AUD 50,875, as the purchase price is above the threshold for any first home buyer stamp duty concession. For 2022–2023, the annual property tax on this property would be AUD 2,560.

Ms L is unsure how long she will own the property, but has heard that about half of owner-occupiers sell their property within around ten years. Not having to pay stamp duty genuinely helps reduce the upfront cost of purchase, so she chooses to pay the property tax.

What Happens When You Sell a Property That’s Subject to the Property Tax?

Please note: only first home buyers are eligible to pay the property tax; all other purchasers must continue to pay stamp duty as usual.

So if you buy a property from someone who has been paying the property tax, you will not be required to pay the property tax (unless you are also an eligible first home buyer and choose to pay the property tax).

In Summary

The formal introduction of the property tax in NSW should ease property purchase pressure on many younger buyers and lower-income groups, and reduce the upfront cost of buying a home. As the examples above illustrate, many first home buyers may sell their first property within a few years, in which case paying the property tax is likely to be more favourable. The introduction of the property tax gives everyone more choice — at the very least, rather than paying tens of thousands of dollars in stamp duty upfront, buyers can pay AUD 400 a year plus 0.3% of the land value instead.

Whether it’s property tax or signing a contract, buying and selling property in Australia involves many details that cannot be overlooked. We strongly recommend proceeding carefully and seeking advice and analysis from qualified professionals.