NSW stamp duty reform a positive move?

State governments are not known for sweeping tax reforms. In NSW they’ve done little more than tinker with tax policies for decades.

But that changed on Tuesday when Treasurer Dominic Perrottet used the state budget to take "the first firm step" to replacing stamp duty, a tax levied on property purchases in NSW since 1865. NSW Treasurer Dominic Perrottet wants to replace stamp duty with an annual property tax credit.

The proposal, he claimed, was "a realistic pathway to achieving the most important state economic reform of the last half century".

Perrottet was immediately praised by business leaders and economists. Even the Reserve Bank governor, Philip Lowe, spoke positively about the move.

"We are seeing in a number of areas increased reform," he said on Wednesday. "A good example of this is the NSW government's decision to consult on the switch of stamp duty to a general property tax. That's the type of reform people have been calling out for for years. It’s been slow in coming, it’s politically difficult but we’ve seen the NSW government decide to move in that direction."

But it is one thing to announce a big tax reform, now the challenge is to implement it.

What is the government proposing?

Under Perrottet’s plan NSW home buyers would have a choice between paying stamp duty up front – normally a little under 4 per cent of the purchase value – or opting for a smaller annual property tax.

Once a property has been traded under the new scheme it would remain annually taxed for subsequent owners. Existing home owners will not be affected until they choose to purchase another property. A consultation paper released with Tuesday's budget suggests that for owner-occupiers the new property tax consists of a fixed annual rate of $500 plus 0.3 per cent of the unimproved land value. This approach is broadly in line with council rates.

Analysis of that proposal by the Grattan Institute’s Coates shows an owner-occupier purchasing a home at Sydney’s current median price of $1.15 million would pay stamp duty of $48,500. But if that buyer opted for the new property tax instead, they would pay about $2230 annually. That amount would then rise slowly over time due to indexation.

The consultation paper says owner-occupiers and farmers would pay a lower annual property tax rate than housing investors, who in turn would pay a lower rate than commercial property owners. The new property tax would also replace the existing NSW land tax (separate to stamp duty) which is levied on residential properties other than the principal place of residence valued above a certain threshold, including investment properties and holiday homes.

The NSW government says protections would be put in place to ensure the introduction of the annual property tax does not result in rent increases without a tenant’s agreement. A hardship scheme will also be introduced to assist homeowners liable for the new property tax who suffer a financial shock such as unemployment.

For first home buyers, the state government has flagged replacing existing stamp duty concessions with a grant of up to $25,000. Perrottet estimates that up to 50 per cent of NSW properties will be paying the annual levy within about 20 years and that stamp duty on property purchases will be completely phased out by around 2050. Analysis of the proposal by the Grattan Institute shows an owner-occupier purchasing a home at Sydney’s current median price of $1.15 million would pay stamp duty of $48,500.

Source: A duty to reform: NSW takes 'path of least resistance' with tax switch (smh.com.au)