Stamp duty holds centre stage as home buyers' most hated expense so heads turned when the NSW government recently announced a stamp duty reform.

Known as the First Home Buyer Choice and due to start in January 2023, the new legislation will give first-home buyers (FHBs) the choice between the current one-off stamp duty fee or a smaller annual land tax.

Let's take a look at what the NSW land tax means for you.

Basics in a nutshell

The First Home Buyer Choice was announced in NSW's 2022-2023 Budget on Tuesday, June 22.

From January 16, 2023, FHBs who decide to ditch stamp duty for the new NSW land tax will need to pay $400, plus 0.3% of the property's land value, every year.

As well, and unlike current FHB concessions which only allow for no stamp duty for homes of $650,000 or less, the new scheme is available for every FHB property of up to $1.5 million as well as for vacant land purchases of up to $800,000.

However, in this latter, case, FHBs will need to pay $1,500 annually as well as 1.1% of the property's land value.

Other details to note include:

• You must not have received any other FHB grants or concessions
• You must move into the property within 12 months of purchase and live in it continuously for at least six months
• The above payment figures will be indexed every year, ie will rise in line with inflation, wages, etc
• The government plans to establish the legislation in NSW Parliament within the next six months
• FHBs who sign a purchase contract between now and January 15, 2023, can opt to pay the land tax; however, they will need to pay applicable stamp duty until January 16, 2023, after which they can receive a refund of this cost
• While the land tax choice is annual, FHBs can pay it in quarterly instalments; however, this tax will be assessed over a financial year
• FHBs who choose the land tax option can't change their minds later and switch to the stamp duty choice
• The property is not permanently locked into the scheme, ie new owners won't be affected

Behind the basics

NSW Premier, and former Treasurer, Dominic Perrottet has been planning the First Home Buyer Choice since at least 2020, well before his relatively new role as head of state.

Mr Perrottet's initial, much bigger idea saw the state scrapping stamp duty altogether and instead, having every home buyer - or at least 80% to begin with - pay land tax alone.

However, the revenue that stamp duty brings to the government table and even more so, how this revenue will be replaced after stamp duty is abolished, has - unsurprisingly - been a hurdle.

After all, in FY2021 alone, homeowners' stamp duty payments gave the government around $9 billion in annual turnover.

In March, industry expert CoreLogic pointed to the 18.1% revenue that state and local governments enjoyed in FY2020 from stamp duty - a figure it said would have increased substantially over the most recent financial year due to surging housing values and record levels of transactional activity - as a key reason why stamp duty changes would be tough.

As such, the industry expert noted that completely eliminating stamp duty would be a "major hurdle" for state governments even those such as Mr Perrottet who wish to change their stamp duty policies.

CoreLogic explained that 10 years ago, only 11% of Sydney properties were selling for $1 million or more but in this period, the city's CPI has increased by 21.8% and housing values have more than doubled, up 109.5%.

"The result is a significant amount of bracket creep has pushed roughly half of Sydney dwelling sales over the past year into the highest stamp duty bracket," the expert added.

Industry expert recommendations

The federal government certainly hasn't come to the NSW government's budget table to assist with the gap left by the First Home Buyer Choice either, which seems to be the key reason why FHBs - and only some at that - are eligible for the new plan.

However, there are other reasons why industry experts are not jumping for joy about the NSW government's stamp duty reform.

Industry responses to Mr Perrottet's new NSW land tax scheme have in fact been largely low-key.

REINSW CEO, Tim McKibben, admitted the First Home Buyer Choice was positive news at face value, as it would give FHBs more cash to spend and make the property market more competitive.

"However, if the first home buyer is buying their ‘forever home’, then this option becomes less attractive,” Mr McKibbin said.

“For first home buyers in the market now, the question is ‘should I wait for the reforms to kick in?'"

The Tax Institute, a membership of tax professionals and educators, was more positive in a report released in October 2021.

The organisation largely welcomed Mr Perrottet's plan to replace stamp duty with a tax that's "more efficient and reduces access and mobility barriers for families" rather than that of stamp duty, which it described as an "archaic and antiquated .. inefficient and inequitable tax".

"Stamp duty's justification in a modern world is questionable at best," the report said.

"An annual land tax allows people to enter the property market, downsize or upsize their home or relocate as they see fit, without the burden of large, lump-sum tax payments."

However, the Tax Institute admitted it was unsure of some aspects of the scheme and would need to see further details of it.

Is stamp duty or NSW land tax best for me?

Some of those in the real estate game now believe it may be easier and simpler for FHBs to pay upfront stamp duty as always and move on with their lives - rather than continually paying a land tax that could easily increase over the years.

Yet if you're an eligible FHB, we recommend you look at your budget and calculator yet again.

After the First Home Buyer Choice legislation is enacted later this year, an NSW government property tax calculator will also be available and in the meantime, Revenue NSW has plenty of calculators help to assist you with your financial plans.

Perhaps most importantly, don't forget that if you're an FHB considering a purchase below $650,000, you're eligible to pay nada stamp duty - and these concessions aren't changing.

We're here to help

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