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November 20,2022

New Stamp Duty Opt Out for First Home Buyers – Are you better off?

Legislation has recently been passed allowing first home buyers to opt out of stamp duty in lieu of an annual land tax. This is a watered down version to the original proposal put forward a few years ago however likely that it is viewed as the first step in a major overhaul to stamp duty to occur over several years. Let’s take a look at a few questions and see what we can look forward to.

How does it work?

In short, first home buyers forego paying a large lump sum stamp duty on a purchase to pay an annual land tax on the property for every year the property is owned. This legislation is proposed to be in force from January 2023. The land tax is calculated on the rating value (or Valuer Generals valuation) of the property as of that year.

How does it affect you as a first home buyer and will you be better off?

There’s good and bad. Land tax is payable for as long as you own the property. So depending on your property strategy, you may still be better off still paying a one off stamp duty instead of land tax forever. We have run several scenarios internally using detached property (low density house, duplex and townhouse) assuming differing levels of value growth over time based on historic averages. The break even point seems to be consistently around 6-7 years. This reduces if there is significant capital growth during the period of ownership and conversely increases if there is a correction during the period of ownership. Using strata units, the average break even across our examples increases to around 11-12 years. This is consistent with average period of ownership in Sydney at the moment (unlikely to be a coincidence). If the property is your forever home or you plan to accumulate properties as an investment strategy, you might be better off paying stamp duty on purchase. For most people, their first property is a stepping stone and usually will be sold to fund an upgrade in years to come. If this is the case, land tax may be the preferred option. You can complete your own calculations using the Service NSW calculator found here. Just as a side note, the average period of ownership of a property in Sydney of 12.4 years. This has increased in recent years too from around 7.5 years in 2009. This is thought to be primarily due to transaction costs (Stamp Duty on purchase and CGT on sale being the biggest ones) as well as well documented affordability issues in the Sydney market. We may see in the future that a possible benefit of these changes is that property is more fluidly transacting in years to come. This benefit wouldn’t be evident in the market till the legislation is widened to cover all purchasers (the likely end goal in my opinion) and a generation of owners that have already paid stamp duty have washed out of the market however. Increased deposit If you aren’t paying stamp duty, you will likely have a few more dollars to throw at your purchase at the start. This may provide options of a lower overall loan amount, chance to buy something better with your money, or bring your purchase forward in time. This benefit will be partly offset by a slight reduction in serviceability due to higher ongoing costs of ownership being the new annual land tax. Off The Plan (OTP) Purchasers The decision to opt into this scheme with an off the plan purchase may be a bit more difficult when it comes to OTP strata properties. Reason being valuations for properties are not completed by the Valuer General till they are registered, often 12 months or more after you sign a contract for an OTP purchase. They are then apportioned using the Unit Entitlement which is generally only known just prior to registration of the Strata Plan. What this means for purchasers is they have to decide on whether they want to opt in to land tax without knowing the value of their property or its unit entitlement in the development that will be the basis of the land tax being levied. The most rational way to overcome this by developers is by making an estimate of this value. However, if you are making a financial decision of this significance, you’d hope it would be using hard evidence. My discussions with industry experts and developers have not seen a resolution to this just yet but I would imagine that a solution would have to be in progress somewhere given the volume of OTP sales in the Sydney Market. Has it been rushed in? Possible however unlikely. These changes are the brainchild of Dominic Perrottet for many years and were being discussed in the media as long as five years ago when the market was soft during the previous property downturn. In saying that, there is an election looming and housing affordability is one of those things that always swings voters, especially first home buyers. The result of the elections will also impact the staying power of this scheme given that the Labor government has already mentioned that this legislation will be repealed if they win the state elections.