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Stamp Duty vs Proposed Property Tax: Which Is Better For You?

In recent news, the NSW government has been thinking about changing our property tax system, giving Australians the choice to avoid stamp duty’s large upfront costs when buying property by paying a smaller annual property tax that’s based on land value, on an ongoing annual basis. 

In this article, we’ll look into how the proposed property tax differs from stamp duty, so you can decide for yourself which one is better for you.

What Is Stamp Duty?

Stamp duty is a one-off tax paid on both residential and commercial property. It’s based on the sale price of the property, with the tax rate increasing as the purchase price increases. The average rate today is 4%, which is high enough to be a serious imposition on the buyer. But the NSW Government is considering implementing a smaller annual property tax instead, something that could eliminate many of the initial financial challenges that Australians face when they’re hoping to buy property.

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Saving up for a downpayment can already feel like an uphill climb, with the average worker taking up to 2.5 years to save up for stamp duty alone. That extra 4 per cent can feel insurmountable even when people are downsizing or moving for their job. 

The NSW Review of Federal Financial Relations (2020) recently called for an end to the stamp tax, a growing trend among property experts who want to level the playing field for the average buyer.

So What Could Property Tax Look Like In The Sydney Property Market?

It’s clear that stamp duty currently places a burden on the average buyer, especially as residential property costs continue to rise and people are moving more frequently. The idea behind the new proposals would be to give property owners a choice. Instead of the mandatory lump sum imposed by stamp duty, property owners could opt for a smaller yearly charge instead.

In the past several years, we’ve seen the Sydney property market become more frenetic. It’s becoming more common to move more frequently. Between increases in earnings and equity growth from a surging market over the past few years, property tax is a more reasonable charge for those who are already upsizing every 4–5 years.

The rate of the property tax would likely be somewhere between 0.3—0.5 per cent, which would total 2.5 per cent in over five years (far lower than the average 4 – 4.5 per cent of stamp duty). Property tax also frees up the finances of the home buyer, giving them more options across the board when securing their deposit to purchase property. They would no longer have to come up with stamp duty in addition to their deposit, which allows them to either increase the size of their down payment or purchase the house with less upfront capital.

The main negative for property tax is for investors, especially since there are discussions that the property tax owed by investors would be closer to 1% and essentially would be paying the equivalent of stamp duty every four years. This would also take a big bite out of their rental yields and cause investors to look for alternative investments. Although, ultimately, some argue that this would end up as a positive for buyers as fewer investors would free up property availability and make the dream of home ownership more affordable. 

As of now, there’s been nothing more than discussions surrounding stamp duty and property tax. However, most property experts seem to agree that stamp duty is an outdated concept that imposes more barriers on the everyday citizen. While it’s unclear exactly what the benefits will be, eliminating it should increase the movement within the market and help communities grow.

Which Option Is Right For Me?

Ultimately, choosing the right option will come down to your individual circumstances. You will need to ask yourself how long you plan to live in the property for and consider the ongoing property tax percentage. Investors will need to decide whether the imposition into your rental yields is worth the upfront savings. The fluctuating rates for the annual property tax could very well total far more than the stamp duty if you plan to hold the property for a long time, and this is true for both residential owners and investors.

If you want to learn more about changes in property taxes and how they affect you as a homeowner, you can trust Shore Financial to give you reliable advice to help you figure out your next steps. And if you’re looking to explore other home loan or mortgage financing options, Shore Financial is committed to give you the solution that fits your needs while making the process as stress-free for you as possible. 

Give us a call today to speak to our mortgage brokerage specialists, and get the advice you need.

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