August 27, 2021

Stamp Duty Reforms - The Good the Bad and the Ugly

The need for stamp duty reform is nothing new. With seemingly never-ending property inflation, it could be argued that the current stamp duty system is outdated and disproportionally affects first time buyers. With that being said, it should come as good news to all prospective property owners that the New South Wales government is looking to fade out stamp duty. In this article, we break down the suggested reforms, what it means for first-time buyers, and who are the real winners and losers. 

What are the suggested NSW stamp duty reforms? 

The proposed reforms would see new homeowners either opting in or out of stamp duty. If the buyer chooses to forgo stamp duty, they will have to instead pay an annual property tax based on their land value and property use. Once a property is subject to land tax, it remains the only option for that property in future sales. 

Why is NSW reforming stamp duty? 

The government has said the main reasoning for the reform is for the benefit of first-time buyers. By wavering the large up-front cost of stamp duty in favour of a smaller annual tax, the hope is that this would make the initial step of purchasing a property more affordable. Treasurer Dominic Perrottet stated in parliament “We’re progressing our property tax proposal because we know housing affordability is the challenge of a generation and we want young people to get a foot in the door,”. Additional incentives in the proposal also include a grant of up to $25,000 for buyers to further ease the burden of first-time purchasing.

What are the potential pitfalls of the reforms? 

Whilst this may all sound incredibly positive, opposing politicians and economists alike have been quick to flag their concerns. One of which is the likelihood of artificial property inflation. If stamp duty was to be removed as well as the proposed grant being brought in there are concerns that this would just incentivise sellers to increase their prices further. The National Housing Finance and Investment Corporation (NHFIC) further cemented this in their latest report titled “Stamp Duty Reform: The Benefits and Challenges”. In the report, they state they foresee dwelling prices increasing as stamp duty is removed as “the removal of transfer duty would be capitalised into prices”. The  report also used ACT as an example which saw its house prices rise once stamp duty reforms were introduced. 

Additional concerns include the long-term costs for property owners. Although forgoing the large lump sum may seem incentivising, the annual tax may work out more expensive in the long term. Property expert Ravi Sharma likened it to outrightly buying a phone versus purchasing one on a payment plan. Whilst the payment plan may sound enticing, it generally means you end up paying more money in the long term.

Who are the real winners? 

Sharma further hypothesized that the abolishment of stamp duty would work in favour of property investors looking to “flip” dwellings. He theorised that the removal of stamp duty would favour investors looking to buy for the purpose of renovating and then selling at a premium as they potentially could opt for the cheaper annual tax option.

It could also be argued that annual tax to be paid for the entirety of homeownership may work out more favourably to the tax office in the long run. 

With that all being said, the seemingly good intentions of the government can’t be overlooked. Whilst there are some obvious pitfalls, it hopefully will fulfil its intended purpose of lessening the initial burden for first-time owners making previously untenable goals achievable. 

To finish, predictions and theories on the outcome of the proposals are only speculative at this point, but what we can say with some level of certainty is that if they are to be introduced it is bound to shake up the market in one way or another.