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Stamp Duty or Annual Tax?

In November 2020 NSW and Victorian government budget announcements revealed plans to make amendments to stamp duty paid when a buyer purchases a residential property. In NSW the buyer would have a choice of paying the upfront stamp duty, which we assume will be as per the current ad-valorem rates, or pay an ongoing smaller annual property tax. It’s important to note that changes are not yet finalised so the impact will be different depending on :-

  • applicable annual ongoing rates of tax

  • the type of purchaser

  • the purchase price

  • the purchase location

  • how long the buyer intends to retain the property

The last two points above are important because in many metropolitan areas where property prices are much higher than most regional locations, the election to pay an annual tax in preference to the upfront one off stamp duty cost, could be of great benefit. A purchaser may have a smaller cash contribution and is trying to reduce or lower other costs like loan mortgage insurance so instead of having to pay stamp duty and eating into the deposit, the savings/contribution can be applied almost totally to the deposit. As an example a purchase price of $750,000 in NSW would attract $29,085 in stamp duty on the property. Not having to pay that upfront is a great saving. The question then arises as to when does it become more cost effective to pay stamp duty v the annual tax? That of course depends on how long the buyer then intends to hold the property for and is impacted by what the rate of annual tax will be? An annual tax position you would think would tend to promote higher rotation in sales of properties, as it eventually becomes less cost effective for a person to hold on to the property in the long term. In the example above if the annual tax was say $2,000, after just over 14.5 years the purchaser would then have been better to pay the upfront amount. Of course in regional NSW areas where the cost of an average home is generally still less than metropolitan areas, by just looking at the cost holding time factor solely, an owner could perceivably hold the property for a longer term. The Victorian government seems a little less contentious in its’ approach as that state has announced waivers of up to 50% on stamp duty for homes purchased under a contract up to 30/06/2021.

Regardless of which becomes the better option for a purchaser, it is envisaged that these changes should stimulate more home purchases.

So given the above we will await the finalisation of the Governments plans. It will then become important for home buyers in NSW to carefully calculate which will be more cost effective for them, and in doing that weigh up all the factors involved in the purchase.

COMPASS Lending can of course assist in this process for you.

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