The Beginning of the End for Stamp Duty in NSW?

There’s no doubt it’s tough to be a first home buyer in New South Wales, especially in Sydney.

Sadly, rising property prices have seen homeownership rates decline from 70% in the 1990s to 64% today. It’s hard to save a deposit when the median property price in Sydney is over $1.1 million. And it’s even harder when you add on the additional costs associated with entering the market.

These expenses can include everything from legal fees and mortgage application fees to building inspections and removalists. The biggest, though, is stamp duty, which can add two years to the time needed by many first home buyers to save for a property, according to government calculations. 

That’s despite existing stamp duty concessions and exemptions for first home buyers when they purchase a property valued at less than $800,000.

However, NSW premier Dominic Perrottet isn’t a fan of stamp duty, describing it as the “worst tax that any government can have” and “the biggest impediment for young people getting their keys to their very first home”.

The premier has long been vocal about wanting to phase out stamp duty in favour of an opt-in land tax, which would be paid annually. And now it looks like he’ll be getting his wish, thanks to the new First Home Buyer Choice scheme announced in the 2022-23 state budget

What’s the First Home Buyer Choice scheme?

Under the FHBC scheme, first home buyers will be able to choose between paying stamp duty or a smaller annual property tax on homes costing up to $1.5 million.

The tax will be 0.3% of the land value per year plus a flat fee of $400. This would rise to 1.1% of land value plus $1,500 for investment properties.

These tax rates will be indexed each year, so the average property tax payment would rise in line with average incomes. 

First home buyers will still be able to apply for full stamp duty exemption for properties valued up to $650,000, and concessions for properties between $650,000 and $800,000.

Buyers will still be able to pay stamp duty if they prefer, unless the property they are buying has already been shifted to the land tax model.

The NSW government estimates that about 97% of first home buyers, or around 55,000 people per year, will be eligible.

When will the new option be available?

The plan is to have the FHBC scheme up and running from 16 January 2023 – although specific legislation will first need to be approved by parliament.

Will you be better off paying stamp duty or the property tax? 

The decision on whether to choose a larger, one-off stamp duty payment or a smaller, ongoing property tax depends on the land value of the property you will be buying.

The government has provided several different scenarios to help you decide:

• Scenario 1: A first home buyer purchases a home for $650,000. The buyer is exempt from stamp duty, so obviously chooses stamp duty over the property tax.

• Scenario 2: A first home buyer purchases a home for $750,000, which has a land value of $270,000. The buyer has to choose between paying $20,870 in stamp duty or an annual property tax that would initially start at $1,210. At that rate, it would take about 17 years for the cumulative property tax payments to match the stamp duty levy. So the only way for the buyer to choose stamp duty and finish ahead would be to hold the property for at least 18 years.

• Scenario 3: A first home buyer purchases a home for $1.2 million (with a land value of $720,000). The buyer has to choose between $50,875 in stamp duty and an initial $2,560 in annual property tax. For stamp duty to be the more profitable option, the buyer would need to hold the property for at least 20 years.

What about the shared equity trial scheme?

The FHBC scheme wasn’t the only big property initiative announced in the NSW state budget.

The NSW government also launched a two-year trial run of a shared equity scheme aimed at helping single parents, older single Australians and key worker first home buyers break into the property market. 

The shared equity scheme allows buyers to enter the market with a deposit as low as 2% of the sale price, without having to pay lender’s mortgage insurance. Instead, the ­government contributes an equity share of up to 40% for a new home or 30% for an existing dwelling.

The scheme is set to begin in January 2023 and will accept 3,000 applications per financial year over 2022-23 and 2023-24.

The scheme is means-tested: to qualify, your income must be less than $90,000 for singles and $120,000 for couples.

Want to break into the property market? Shore Financial can help. To discuss your home loan options, call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form.