From January 16, 2023, new legislation means first home buyers in New South Wales can choose to pay an annual land tax on their property instead of an upfront stamp duty when buying a first home. The First Home Buyer Choice policy aims to incentivize first home buyers and help them into their own homes sooner, by potentially shaving off nearly two years from the time needed to save a deposit. On the flipside however, increased housing demand from more first home buyers is likely to impact house values and property prices.

Stamp Duty in Australia

Stamp duty is a tax charged by state and territory governments on property purchases, and is paid by the buyer at the time of settlement. The amount paid is dependent on the value of the property, with more expensive properties attracting higher rates of stamp duty.

Stamp duty varies dramatically from state-to-state – you can use this stamp duty calculator to determine what amount would apply in your area. In some states of Australia, first home buyers are exempt from paying stamp duty provided the property they’re buying meets the house price cap in that region.

For example, in Victoria, first home buyers are exempt from paying stamp duty if the property is $600,000 or less, and the cost of stamp duty is tapered for properties up to the value of $750,000.

In New South Wales, where property prices are highest nationally, the house price cap for stamp duty exemption is $800,000 and a tapered exemption exists for properties up to $1,000,000.

Changes to Stamp Duty in NSW

From 16 January 2023, first home buyers can opt out of paying stamp duty in favour of an ongoing annual land tax payment under the First Home Buyer Choice policy. The policy applies to properties valued up to $1.5 million and vacant land for construction of a new home up to $800,000. All other home buyers – and first home buyers buying outside of these house price caps - must still pay stamp duty.

The policy is only open to owner occupiers - although you could convert the property later to an investment with a markedly higher rate of ongoing property tax – and you must move in within 12 months of buying the property and live in it continuously for at least six months before it becomes an investment.

The annual property tax is equal to $400 per annum, plus 0.3% of the value of land and is set to grow in line with Gross State Product per capita (a measure of average income) which, over the past 15 years, has averaged at 3.2 per cent. The legislation provides that individual property taxes cannot grow by more than 4 per cent annually. Once the property is sold, it is no longer subject to an ongoing property tax.

Information sourced from: https://www.nsw.gov.au/initiative/first-home-buyer-choice

The good and the not-so good

Removing stamp duty for first home buyers and offering an alternative option to pay an annual land tax would cut out several years’ worth of saving for a deposit, which would mean more first home buyers could get into their own homes far sooner.

Furthermore, without having to pay stamp duty up front – a significant portion of the cost of buying a home – some home buyers could potentially have more money to spend on buying a first home.

While the policy would certainly incentivise many first home buyers in Australia, the downside is that greater housing demand could lead to higher home values and property prices, which ultimately would benefit the seller.

Moreover, the First Home Buyer Choice policy doesn’t extend to other home buyers, such as empty nesters (older homeowners with no children at home), downsizers or upsizers.

In the future, Government may consider using the policy to streamline the housing market to make it more efficient. For example, free up more family-sized homes for new homeowners by incentivising empty nesters to downsize to smaller homes without having to pay stamp duty when they buy a new property.

For now, the First Home Buyer Choice policy is only applicable in NSW and only available for first home buyers, but we may see other states in Australia adopting similar policies in the future if the policy is successful in NSW.

For more first home buyer advice tailored to your unique situation, contact a Mortgage Express broker today.

Reference: Corelogic

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