I tweeted about Land Tax this week.
Yeh, I know I get all the exciting jobs hey!
Tweeting only allows you a small window of text to get a point across, and this topic deserves more than 280 characters.
Land Tax has been thrown into the spotlight once again, after NSW state government said it has released the findings of its 12-month plus, study.
Is it an additional tax, or a better way to administer the existing tax arrangement?
I will comment on the proposed NSW reform as they have developed some very thoughtful things and one big point that I don’t think they have followed through.
It should be noted, I am talking about their reform only, not about Stamp Duty vs Land Tax debate.
(The NSW paper on the matter can be found here)
Land Tax, what’s the difference?
Currently, purchase transactions that involve real estate are taxed by the state via Stamp Duty. You know the old tax that was to cover the cost of the state office Stamping and filing your documents.
Stamp Duty is a percentage, so as prices rise, so has the tax, meaning that a noticeable cost of buying property is now Stamp Duty at point of purchase.
The Land Tax model has been said to be fairer, as it taxes all land, always and forever.
(Remember I am not debating the two options here)
NSW has performed a study into Land Tax and the results are on the link above. They are promoting this new tax as a way of making property more affordable.
That is a good marketing spiel at this stage in the property cycle when affordability is such a hot topic!
The revenue earned from Stamp Duty for NSW has been calculated at $9.379 billion for the 2020-21 financial year.
It means Stamp Duty is now the state’s largest taxation revenue source, overtaking payroll tax.
The cynical side in me says that as the number of sale transactions is dropping off, so is the sugar hit from massive Stamp Duty revenues, and the state is looking for a way to mitigate that.
NSW has pegged their Land Tax calculation to the valuation of the underlying land, like council rates, so this makes sense.
They have also made the annual tax based around the use of the property, eg residential home owners vs commercial/business etc.
All this is familiar to current set ups involving real property.
So far so good..
The biggest issue when dealing with a new tax, is how to apportion it or transition to it.
Land Tax is no different as there is a whole load of people who have already paid Stamp Duty.
NSW did something a little different to past proposals and that is a game changer in my opinion.
This is where it gets interesting..
NSW have proposed that the next time you purchase a property you can CHOOSE to either pay Stamp Duty or Land Tax.
Choice, from a government?
There are no changes on existing property taxation until the next sale, so this satisfies the people that have already paid Stamps.
The other rule that impacts this decision, is that once the property is registered on the Land Tax system, it stays that way. The next buyer cannot choose to pay Stamps instead of Land Tax.
What does this mean?
For people who change property often, this is great news. Big chunks of cash are not wasted on Stamp Duty.
Also, people who want to stay in a home for a long time, can choose to not have an annual fee and simply pay Stamp Duty instead.
What is the game change part?
This will actually mean the number of Stamp Duty ‘Choice’ properties will reduce over time. As more people take the ‘subscription lifestyle’ option, less and less properties will be eligible for a choice to pay Stamps (next time they sell) instead, requiring payment of Land Tax.
There will be a contingent of people who, for whatever reason, do not want to pay Land Tax. They might be buying for a long time, and it is cheaper to pay Stamps, or they might just hate Land Tax.
No matter the reasons, Stamp Duty ‘Choice’ properties, will be reducing in number and therefor will create a scarcity effect.
These properties will also sell for a higher price than land tax properties due to the lower ‘running’ costs over time.
Don’t believe me?
It is already happening with electric cars.
Car models with an EV option sell for a much higher price than the same model petrol car, sometimes DOUBLE the price. This is said to be due to build costs etc, not Stamp Duty, but it still means a higher upfront outlay.
Yet people buy them for their REDUCED cost of ownership each year. (check this article)
Sound similar?
If Land Tax remains opt in for NSW, this will absolutely cause Stamp Duty ‘Choice’ properties to sell for a higher price due to less of them available and a lower annual running cost.
Mark my words, this WILL BE the result if Land Tax is optional.
Consider the implications of a two-tiered price system for property based on what tax you choose to pay.
Also consider the demographics and suburbs that will choose an annual payment to smooth cashflow vs a lump sum to remove long term costs.
Old Money / Long Money will choose the Stamp Duty option, every time…
The societal divide will widen yet again.
Final Words..
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Since 2004, Scotty North has been helping people buy the best properties for their needs at prices that simply speak for themselves.
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Scotty North is a Qualified Property Investment Advisor (QPIA), with accreditation’s in financial planning, mortgage broking and real estate.
By carefully considering his clients’ goals and planning for market changes via demographics and trends, Scotty designs a future proof outcome not only specific to the client’s needs but dynamic in its execution with performance indicators and exit strategies built in.