The NSW Government recently announced proposed changes to Stamp Duty, framed as the First Home Buyer Choice (FHBC) initiative. Read more at this link: https://www.nsw.gov.au/initiative/first-home-buyer-choice.
The initiatives allow eligible buyers to select whether they wish to pay stamp duty or an annual land tax.
This has been designed by Government to reduce the up-front costs for buyers and help young people get into the market sooner.
Under the proposed regime, however, investors pay a much higher land tax rate than owner occupiers.
What this means for Investors
For property investors, this is a good thing in my opinion as it gives you choice to select the best tax option to suit your individual scenario.
You should consider things like:
> How long do you plan to keep the investment ?
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- Maybe you plan to flip the property in 18 months, in which case paying the annual Land Tax would be logical
- If you want to keep the property for a long time though (as you can see in the graph below) then the Land Tax costs will accumulate significantly, and therefore Stamp Duty would likely be the better option
> Your available funds – can you afford stamp duty? For some investors paying Stamp Duty may not be an issue
> Your risk tolerance – are you OK with the uncertainty of what a land tax into the future could mean for you and your cash flow?
> How does it impact your Tax (always seek advice from your Accountant)
> Type of Property - Apartments have a lot lower Land component than houses, so some Investors may look more at Apartments as the land tax would be significantly less over time.
Based on the proposed formula from Government, the graph below shows how much tax an Investor would pay for the first 10 years of their investment for the 2 options:
Key assumptions for above graph – Investment property, Value $1M, Initial Land component $600k, Land value increase 2% per annum. Based on formula from NSW Govt which is $1,500 plus 1.1 per cent of land value (for investment properties).
As you can see in the image above, if an Investor keeps this property for over 5 years they will start to pay more total tax than if they paid Stamp Duty. If you keep the property for a long time (over 10 years) you can also imagine that the costs would be significant, especially if the value of the Land continues to increase.
This is just one example though and you must do the sums, and get good advice, to suit your situation.
First Home Buyers come Investors
If you are a first home buyer and elect to pay Land Tax BUT you also plan to turn your home into an Investment in the future, you will pay the higher Land Tax Rate into the future as investors get charged more. This is a very important point for first home buyers to consider. The lower Land Tax can be appealing but you have to always come back to your long-term strategy.
You have one chance to make this decision so choose wisely.
Seek Advice
Ensure you seek the appropriate advice when buying your next Investment Property, from a Buyer’s Agent, and also from your Accountant and Financial Adviser, to ensure you take a holistic view of your next investment and make the best possible decision based on your individual circumstances.
Personally though, for my next investment in NSW, I will still elect to pay Stamp Duty as the risk of spiralling Land Tax costs are too big for my risk appetite and planned strategy. Stamp Duty is also regarded as part of your Cost Base so when you do sell your investment you can effectively claim this back later.
Contact the Niva Property team for any questions about this tax reform and what could be the best choice for you.
More Details and when does this start?
This initiative likely comes into play for buyers who sign a Contract on or after the 16 January 2023, however, there may be options to claim this earlier than this date. To find out more about this and if you are eligible, click here.
