NSW government has announced it will look to reform the stamp duty regime and shift towards land tax as the basis of tax on property in the state.
NSW Stamp Duty vs Land Tax
This is a long awaited piece of reform by all accounts. Stamp duty or a tax on the value of the property is an extremely inefficient form of tax, as property value increased more than average income, the tax burden of stamp. The main arguments against a stamp tax are:
- It is a straight added cost of buying into the property market
- It prevents downsizers selling existing property as it adds to the cost of relocation.
The chart below shows that over the last 30 years average earnings increased 3x since 1990 while the average stamp duty is almost 7.5x since 1990 on the property. As the value of the property creeps above the stamp duty threshold, more households pays stamp duty now vs the original intent of targeting high value properties.
The NSW government look to remove stamp duty on property purchases and shift the reliance of the tax burden to the land tax. The obvious outcome for this is that land tax rate will increase in the future either via increase property tax rate or the silent creep from higher unimproved land value as determined by the NSW valuer general office.
What is a land tax?
A land tax is a tax where the amount charged is on the land value or the unimproved land value of the property. For example if a property is worth $500k, the unimproved land value is what the land is worth if everything on the land is removed.
Who sets the land value and how do I find the unimproved land value?
The NSW valuer general sets the unimproved land value. The land tax is charged by council and the unimproved value is stated on your council rates.
Removing Stamp Duty Impact On Property Markets
The simplistic way of looking at the first level outcome of the shift from stamp duty to land tax is it is positive for the Sydney property market.
Property prices should see an immediate bump as buyers could suddenly afford abit more and given the limited stocks will result in pricing in the increase in the current prices.
Over the medium term we expect volumes to increase as current owners can relocate at a much lower transaction cost. Qualitatively it will become an impetus for many downsizers to sell down their houses and drive demand for apartments. But these will be a particular form of apartment built for owner occupiers and not the type of inner city investor stock you typically see.
Stamp Duty Reform Impact on Commercial Property
The impact on commercial real estate investments is even more straight forward where given the same return hurdles, for the current owners the value of the asset would have improved as the buyers could pay more to achieve the same outcome.