The New South Wales 2020-21 budget announcements included a number of measures aimed at boosting the economy. One of which was the first major stamp duty reform in over 150 years.
Stamp duty in New South Wales was introduced in 1985 – a time when property prices were much lower, and people moved around less. With this in mind, many argue that the current policy is outdated and does not serve its original purpose in the world we now live.
But what do the proposed stamp duty changes mean for residential investors in New South Wales?
What is the proposal and what does it mean for investors?
Before we get started, it’s important to note that this change is still a proposal and subject to change following community feedback. But for the sake of this discussion, we will consider what it currently means for investors.
The current proposal will give those looking to buy a home two options:
1. Pay stamp duty upfront and ongoing land tax (i.e. the current compulsory arrangement)
2. Pay an ongoing annual property tax
These options are available for everyone looking to buy a residential or commercial property, including investors. The rate of the property tax changes between the groups, so the tax rate for an owner-occupier won’t be the same as it would be for an investor.
What does this mean for residential investors
The current proposal is available for property purchased for residential owner-occupiers, investors, primary producers and commercial owners.
The proposal includes a rate framework, where the property tax rate changes depending on the purpose of the land. The suggested annual property tax rate for investment properties is as follows.
$1,500 + 1 per cent of the unimproved land value
Investors will still have a choice.
One of the biggest drawcards for investors is that the proposed annual property tax will be tax deductible in the financial year it’s paid. While currently land tax is also tax deductible, stamp duty isn’t directly.
Stamp duty is classed as a capital cost. This means it isn’t a deductible expense but is instead included in the property’s overall cost base.
Case study – proposed stamp duty reform
Martha is a first-time property investors and is deciding whether she will go down the traditional path of stamp duty and land tax or pay the new property tax.
She has a relatively short investment strategy and wants to sell the property in four years’ time, based on the market growth. Therefore, her overall aim is to go with the option that will save her money at the very beginning when her financial outlay is higher.
The table below shows the scenario of both options
Martha decides to go down the property tax route. This resulted in a first-year cost of $6,600, instead of paying upfront stamp duty of $33,585. Over the four years of ownership, the total property tax payable would be $27,593. She will also benefit from claiming property tax as a deduction each financial year.
BMT Tax Depreciation is here to help you in every stage of your property investing journey. The BMT team works with you, your accountant and your property manager to ensure you claim the most depreciation deductions possible.
To learn more about BMT, Request a Quote or call the team on 1300 728 726.