Stamp duty was first introduced to NSW in 1865. It was a time when property prices were far lower relative to income, and people’s first home was usually their “forever” home.
Both our markets and our habits have changed considerably since then, with people far more likely to move home several times in their lives and stamp duty becoming progressively more expensive, rising from an original 0.5% to an average of 4.0% of the value of a property.
For many Australians, having to save for the up-front cost of stamp duty adds years to their pre-purchase saving time, making it that much harder for them to take their first steps into homeownership.
To help first-home buyers realise their dream of owning a home, the NSW parliament has just passed legislation that gives eligible buyers an alternative to stamp duty. The scheme is called First Home Buyer Choice, and we are going to unpack it for you right here.
What exactly is First Home Buyer Choice?
The scheme, which comes into effect on 16 January 2023, provides eligible first home buyers with a choice. They can opt to pay traditional stamp duty as an up-front lump sum or choose instead to pay an annual property tax, currently set at $400 plus 0.3% of the value of their property.
Replacing the hefty up-front obligation of stamp duty with a far smaller annual tax will effectively lower the initial costs associated with purchasing a home and is expected to reduce the time required to save for a first home by up to 2 years for around 57,000 people per year.
Who is eligible?
However, not all first home buyers can access the scheme. The eligibility rules state that to access the scheme, you
- must be an individual over 18 years old
- or at least one person you’re buying with must be an Australian citizen or permanent resident
- or your spouse must not have previously owned or co-owned residential property in Australia or received a First Home Buyer Grant or duty concessions
- must move into the property within 12 months of purchase and live in it continuously for at least 6 months
- must sign the contract of purchase on or after 11 November 2022.
- Furthermore, the property you buy cannot exceed $1.5 million dollars in value.
How does property tax compare to stamp duty in financial terms?
When it comes to deciding whether to choose to pay stamp duty or opt for the new scheme, it’s important to consult with your trusted financial advisor, as each case will be different.
An important consideration is the length of time you expect to hold the property, as the obligation to pay your annual property tax will only end when you are no longer the owner of the property in question.
It’s also important to think about whether you are likely to hold onto the property as an investment, because annual property tax rates are higher for investment properties, currently sitting at $1500 plus 1.1% of the property’s land value.
The NSW government has provided a property tax calculator to help you work out an estimated property tax for the first year of ownership and compare it with the expected stamp duty on the same property.
To use the calculator, you’ll need to input the property purchase price, address of the property (or estimated land value), its intended usage (owner-occupier or investment), and whether it is a new or existing dwelling.
An example
A $950,000 apartment in Randwick with a land value of $323,400 would incur an estimated up-front payment of $37,840 in stamp duty or an estimated annual fee of $1,371.
Annual tax rates are subject to indexation, so the annual fee will vary from year to year, but it would still take upwards of 20 years of paying property tax to equal the cost of the original stamp duty fee.
For those who plan to sell their property in the short-to-mid-term, property tax could end up being the cheaper alternative. However, if you are planning to hold your property for a long time, it may be worth opting for stamp duty.
Talk the options through with your advisor before making a final decision.
What if I buy before 16 January 2023 but want to pay property tax?
If you buy your home between 11 November 2022 and 16 January 2023, you will still be able to choose between stamp duty and the property tax, although you will have to wait until the scheme officially kicks in before you can apply.
Once the scheme opens in early 2023, you will be able to lodge an application for the property tax scheme. If you have already paid stamp duty on your property, it will be refunded to you if your application is successful.
What happens when I sell my house?
Whoever buys your house will become liable for either stamp duty or property tax, depending on whether they are a first-home buyer and the choice they make.
There is no set amount that you have to pay as property tax, simply an annual fee. When you sell the obligation to pay that annual fee expires.
Of course, when you purchase your next home, you will no longer be a first-home buyer and, as far as current legislation is concerned, you will have to pay stamp duty on the purchase.
Summing up
With the burden of stamp duty making it even harder for first home buyers to save for their dream property, the NSW government’s First Home Buyer Choice offers a welcome alternative many hope will help them achieve their dream of owning their first home earlier and with lower up-front costs.
You can find out more about the scheme by visiting the dedicated NSW government website.
Sources
[1] https://www.nsw.gov.au/sites/default/files/2021-04/nsw-treasury-property-tax-proposal-consultation-paper.pdf
[2] https://www.nsw.gov.au/initiative/first-home-buyer-choice
[3] https://www.nsw.gov.au/initiative/first-home-buyer-choice
Other buying, selling and investing articles and resources
Guide to property investment success in NSW
Selling a house or apartment in NSW eBook
Buying a house or apartment in NSW eBook
Property investment in NSW FAQ’s
What is a property cycle and what drives a change?
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