Digital art for land tax
Digital art for land tax

How different homes fare under land tax reform

Buying a new home on a smaller lot but don't intend to live there forever?

Then congratulations, you are likely to be the biggest winner under the state government's radical new property tax scheme.

But peak bodies have warned the contentious proposal could also force extra costs on farmers during drought and provide no benefit to younger retirees looking to downsize.

 

Choosing to pay a yearly tax rather than an upfront sum would result in someone ultimately paying more if they stay in a home long-term.

Treasurer Dominic Perrottet identified this "break even" point at about 12 years but the point at which someone paying property tax is worse off still depends on a number of factors.

The significant variation in the way houses of similar cost would be treated under NSW Treasurer Perrottet's bold proposed reforms can be seen through properties in Sydney's west that are currently on the market at around the $1 million mark.

Under the existing stamp duty system, the residences - in Dundas Valley, Rydalmere and Pemulwuy near Greystanes - are treated roughly equally.

The current stamp duty would be $40,000-$45,000 at the time of purchase.

However, under the property tax proposal being advanced by Mr Perrottet instead, the burden is very different.

This is because the new system applies to land value. By contrast, when calculating stamp duty, the starting point is the selling price.

The four-bedroom Pem­ulwuy pile, which sits on a relatively small 312m2 site with a lowish land value of $406,000, would attract property tax of $1718 in the first year.

Over five years the cost is $9268, which is less than a quarter of the stamp duty bill.

If the owner-occupier chose to sell at this point they would have paid $30,000 less in tax than had they opted to pay stamp duty upfront.

It takes 17 years for the ­Pemulwuy home's property tax bill to pass the stamp duty cost.

After 20 years, the total is just over $50,000.

Meanwhile the three-bedroom Dundas Valley home, which is on 575m2 with a land value of $758,000, faces a first-year property tax of $2774.

After five years the cumulative charge is $14,965. That is about a third of the stamp duty cost.

The three-bedroom Dundas Valley home, which is on 575m2 with a land value of $758,000, faces a first-year property tax of $2774.
The three-bedroom Dundas Valley home, which is on 575m2 with a land value of $758,000, faces a first-year property tax of $2774.

At just 13 years of ownership, the property tax bill rises beyond the stamp duty cost.

When 20 years is reached, the owner of this home would have paid nearly $81,000 by choosing the property tax option at the start compared with $45,000 had they opted for stamp duty.

The Rydalmere address in the accompanying graphic is also on a larger block that has a higher land value than the Pemulwuy home.

The 20-year property tax bill on the Rydalmere residence is $14,000 higher than for Pemulwuy.

The property tax bill at Rydalmere is $10,000 more than the stamp duty cost.

These calculations are based on land values rising at 3.8 per cent a year, which is the same rate applied by NSW Treasury in the case studies on its website.

It would take 17 years for the Pemulwuy home’s property tax bill to pass the stamp duty cost. Picture: Christian Gilles
It would take 17 years for the Pemulwuy home’s property tax bill to pass the stamp duty cost. Picture: Christian Gilles

A price threshold could ­initially be put in place to ­ensure paying stamp duty is the only option for buyers of more expensive property. No threshold has been set but it could be about $1.25 million.

A proposal to ensure people doing it tough could access government support to pay yearly property tax has also not been finalised, although its believed nobody would be required to sell their home to pay property tax.

It's understood protections are already in place to prevent landlords passing on taxes to tenants.

NSW Farmers don't support the proposed reform.

President James Jackson was concerned that paying a ­yearly property tax could sting farmers doing it tough during.

"If you opt into it, you pay it every year forever," he said. "We certainly do have reservations about the ability of people to pay (during) drought."

National Seniors also raised concerns that younger retirees may not be better off if buying a property subject to a yearly property tax.

Chief Advocate Ian Henschke said older buyers could benefit from avoiding a lump-sum payment but the model "could stop people in their early retirement from downsizing due to lack of choice if they think they will pay more with a property tax".

Mr Perrottet insisted nothing has yet been decided under the proposed reforms.

Originally published as How three different homes fare under land tax reform



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