On 21 June this year, the New South Wales Government introduced a new housing policy for first home buyers called the “First Home Buyer Choice”, which allows eligible buyers to choose to pay an annual property tax instead of a lump-sum stamp duty. After five months of negotiation, the property reform backed by NSW Premier Dominic Perrottet has now passed Parliament. Although the new property tax legislation will not take full effect until 16 January next year, first home buyers will be able to choose between property tax and stamp duty from 11 November onwards. We have previously covered the detailed policy in NSW’s Major New Housing Policy: First Home Buyers Can Pay an Annual Property Tax! Should You Choose Property Tax or Stamp Duty?.
Today we will look at some frequently asked questions.
1. What is the First Home Buyer Choice?
The Government is now offering first home buyers purchasing new or existing homes valued at A$1.5 million or less the choice to pay a one-off stamp duty or to pay an annual property tax. This policy also applies to first home buyers purchasing vacant land, where the land will be used to build a home valued at A$800,000 or less.
Under the new policy, first home buyers will continue to be eligible for first home buyer stamp duty exemptions and concessions. Because first home buyers purchasing new or existing homes valued at A$650,000 or less do not pay any stamp duty, they would not choose the property tax. Eligible first home buyers purchasing new or existing homes valued between A$650,000 and A$1.5 million can use the First Home Buyer Choice Calculator webpage to compare the annual property tax against the one-off stamp duty and select the option that best suits them.
2. When does the policy take effect?
The Property Tax (First Home Buyer Choice) Act 2022 will come into full effect on 16 January 2023. However, there is a transition period before 16 January 2023 during which eligible first home buyers must pay stamp duty, but can apply for a refund after 16 January 2023.
If you sign a contract of purchase for an existing home on or after 16 January 2023, you will be able to choose to pay the annual property tax instead of stamp duty. However, you must make the tax choice before settlement. If you choose the property tax, you can change your choice before settlement, but once settlement has occurred you cannot change the tax option you selected.
If you signed a contract of purchase for an existing home between 11 November 2022 and 15 January 2023, and you meet the first home buyer eligibility criteria, you can likewise choose to pay the annual property tax. If you elect to pay the annual property tax, you may make the choice on any day between 16 January 2023 and 30 June 2023. If settlement of the property occurred on or before 15 January 2023, you must first pay the one-off stamp duty, but you can apply to Revenue NSW after 16 January 2023 to have your stamp duty refunded. Once you decide to pay the property tax, that decision cannot be changed. If settlement of the property occurs on or after 16 January 2023, you will not need to pay stamp duty upfront.
If you signed an off-the-plan purchase contract on or after 11 November 2022 and settlement occurred on or after 11 November 2022, you can also choose to pay the annual property tax. However, you need to be mindful of when your stamp duty is due. If your property is for residential use, the timing of stamp duty settlement depends on two milestones: 12 months after the contract was signed, or settlement occurring, whichever comes first. You can likewise apply to pay the annual property tax by first paying the stamp duty and then obtaining a refund.
3. Which buyers are eligible under the policy?
You must meet the current eligibility criteria for the First Home Buyer Assistance Scheme, and the property purchased must not exceed A$1.5 million in value, or land purchased must not exceed A$800,000 in value. Applicants must be individuals aged 18 or over. The first home buyer and their spouse or partner must never have owned or co-owned residential property in Australia, and must never have previously received a first home buyer exemption or concession. First home buyers must move into the home within 12 months of purchase and live there continuously for at least six months.
4. If I choose the annual property tax, how much do I have to pay each year?
In the 2022-23 and 2023-24 financial years, the property tax payable will be A$400 plus 0.3% of the land value of the property, with the land value determined by the NSW Valuer General. From the 2024-25 financial year onwards, the property tax rate will change each year, but the Government will ensure that first home buyers can afford the property tax. The rate system will ensure that the average property tax paid stays in line with Gross State Product per capita. Over the past 15 years, Gross State Product per capita has grown at an average of 3.2% per year. In addition, the law provides that the annual increase in the property tax rate cannot exceed 4%.
5. How should I compare annual property tax and stamp duty?
You can use the Government’s calculator webpage (https://www.service.nsw.gov.au/transaction/calculate-your-property-tax). When choosing between stamp duty and the property tax, you need to consider how long you expect to hold the property, and therefore how many years you might be paying the property tax. If you intend to hold the property for the long term, stamp duty may be a better choice. If you intend to hold the property for the short term, the property tax may be a better choice. Relevant statistics suggest that half of all owner-occupiers sell within 10.5 years, and the average holding period for an owner-occupied home is 22.6 years.
6. If a first home buyer chooses the property tax, do they need to pay a full year of property tax upfront?
No. The property tax can be paid in quarterly or annual instalments, however the property tax will be calculated on a financial year basis (i.e. 1 July to 30 June). The property tax will be levied from settlement of the property (usually when the buyer receives the keys). If a first home buyer owns the property for less than a full year, the property tax will be reduced on a pro-rata daily basis, so the buyer only pays for the days in the relevant financial year during which they owned the property.
7. If a first home buyer is late paying the property tax, will they be forced to sell the property?
No. No one can be required to sell their home upfront to pay the property tax, and taxpayers can defer payment through the property tax deferral scheme. If the Chief Commissioner accepts that a household is unable to pay its property tax, the property tax will be deferred until their financial circumstances change.
8. Can a first home buyer switch from the annual property tax back to stamp duty?
No. Before settlement of the property, a first home buyer can choose between stamp duty and the property tax. Once the choice is made, it cannot be changed after settlement. If a first home buyer chooses the property tax, they must continue paying the property tax until the property is sold.
9. What is the difference between the property tax and land tax?
The property tax is an annual tax levied on a property each financial year based on its land value. Different property tax rates apply to owner-occupied and investment properties. If a first home buyer chooses to pay the property tax on their first home, they will not have to pay stamp duty or land tax on that property. To date, the Government has no plans to change land tax. If the total value of the land you own is above the land tax threshold, you will be required to pay land tax. Land tax is an annual tax levied at the beginning of each calendar year on the total value of all the land you own. However, your principal place of residence will not be counted in the total land value, and other exemptions and concessions may apply to land tax.
10. What is the difference between the property tax and land tax?
From 16 January 2023, you can apply through your lawyer to choose to pay the property tax. For first home buyers who signed contracts between 11 November 2022 and 15 January 2023, an application must be submitted to Revenue NSW, and then the property tax can be selected between 16 January 2023 and 30 June 2023. If stamp duty was already paid at the time of purchase, the stamp duty will be refunded once the property tax application is approved.
11. What is the impact of the policy on buyers who are not first home buyers?
This policy does not change any tax arrangements for buyers who are not first home buyers. This includes non-first home buyers purchasing farmland, commercial property, residential investment property, or buyers moving to a different home.
12. What is the impact of the policy on tenants?
Only first home buyers are eligible to choose the property tax, and they must live in the home they purchase for at least six months. However, some of these first home buyers will eventually move out and rent the home to tenants, in which case they will still need to pay the property tax. Section 40 of the Residential Tenancies Act 2010 requires the landlord to pay tax, but the landlord must not require the tenant to pay the property tax. However, rent movements are determined by the market and by supply and demand, so the first home buyer property tax will not have any material impact on rent levels. If a tenant disputes a rent increase caused by the landlord paying the property tax, they can seek redress through NSW Fair Trading and the NSW Civil and Administrative Tribunal.
Final thoughts
The formal introduction of a property tax in NSW should ease the purchasing pressure on many young people and lower-income groups and reduce the upfront cost of buying a home. Many first home buyers may sell their first property within a few years, in which case paying the property tax will generally be more favourable, and introducing the property tax gives buyers more options — at the very least they no longer need to pay tens of thousands of dollars of stamp duty upfront, but can instead pay A$400 plus 0.3% of land value per year. Whether it is paying tax on a property or signing a purchase contract, buying and selling property in Australia involves many details that must not be overlooked, so we strongly recommend exercising caution and seeking advice and analysis from professionals. If you have any legal questions relating to a property purchase, we have experienced lawyers who can provide you with relevant advisory services.
