In the 2020-21 Budget, the NSW Treasurer announced a far-reaching property tax reform. In substance, land purchasers could elect to be subject to an annual property tax instead of the compulsory existing current transfer duty and land tax regime.
Under the current regime, most properties are not subject to annual land tax because they are an exempt principal residence, farmland or because their value falls below the land tax free threshold. Where such properties are purchased after the reform is implemented the annual property tax would be payable if elected.
For many that will be preferable to the substantial transfer duty imposed on them at the time of their purchase. For example, the transfer duty paid by purchasers of most free-standing houses in Sydney exceeds $35,000 currently.
For a prospective property purchaser, the question now is, should you buy now, or should you wait until the new property tax reform is in place? For that reason, Mazars has undertaken some modelling of the tax calculations under the alternative tax regimes. This is the first of three articles where we reveal the findings of our modelling. In some cases, the results are so stark, the prospective purchaser’s decision when to buy is obvious (that is, of course, if NSW tax was the only consideration).
A focus on residential investment property
In this first article, we focus on the choice to be made by a prospective purchaser of residential investment property in 2021. The prospective investor has two choices:
- Invoke the current Transfer Duty / Land Tax regime through buying now before the changes take effect or through buying after the changes take effect and expressly adopting the current Transfer Duty / Land Tax regime, or
- Buy after the changes take effect and adopt the new Property Tax Regime.
What has been illuminating is how clear the choice becomes when typical property purchase scenarios were processed under our model.
Background – Tax on residential investment property under the two regimes
Almost all purchases of residential investment property in NSW are subject to transfer duty. The rate ranges from 1.25% to 7% and is applied to the property sale price or market price (whichever is higher). Based on current market prices, duty rates of 3.5% to 5.5% will apply to most of the value of residential investment properties purchased in NSW.
Land tax applies to the aggregate value of all taxable properties owned by the investor. It applies at the rate of 1.6% on the unimproved value of land above the tax-free threshold of (currently) $755,000 (however discretionary and other special trusts do not have a land tax free threshold). The rate rises 2% for the aggregate value of taxable properties above (currently) $4,616,000.
Under the proposed regime, the annual property tax on residential investment property would be $1,500 plus 1% of the unimproved value.
Implementing the new regime will be subject to political processes. However, the speed of the NSW Government’s work on the project so far suggests an intention that the choice to elect the annual property tax will be available from some date during the second half of 2021.
Mazars compared three properties to be purchased in 2021 for market prices of $500,000, $1,000,000 and $2,000,000 respectively.
Assumptions & premises:
- The unimproved value of the properties was 75% of the market price (hence $375,000, $750,000 and $1,500,000).
- The tax-free threshold and the unimproved value rose by the same percentage each year.
- A series of other assumptions were made to simplify calculations of the current land tax.
- An annual property value growth rate of 6% applies (slightly below the Sydney average annual growth rate over the past 25 years.)
- We also applied the calculations over 10 and 20 years under scenarios:
- Where the current land tax free threshold was available in full.
- Where it was not available for the property purchase in question and the 1.6% rate applies or instead where the property would be subject to the 2% annual land tax premium rate because of the investor’s other taxable properties.
The total tax paid after both 10 and 20 years were compared.
An alarming initial observation was how much tax is paid on NSW property under either regime or any model. For example, a taxable property acquired in 2021 for $2m (with an unimproved value of $1.5m) will trigger $95,005 duty upfront and total tax of $535,489 over 20 years under even in the most favourable regime and variables. If an investor already holds other taxable property with an aggregate unimproved value exceeding the premium rate land tax threshold of $4,616,000, then acquiring that same $2m property today will trigger total state tax liabilities of $1,198,573 over 20 years.
The critical findings for the proposed residential investment property purchase were as follows:
Individuals or entities acquiring their first residential investment property - whether they purchase now or after the new regime takes effect they will benefit significantly using the current duty/land tax regime. Their savings over 10-20 years when purchasing properties priced at between $500,000 and $1,000,000 range from $46,593 to $258,057. For the property priced at $2m, the investor would only benefit from applying the current duty/land tax regime if they hold the property for more than 15 years.
A discretionary trust acquiring property, or an individual or entity who already owns property with an aggregate unimproved value exceeding the land tax free threshold - will benefit by purchasing the property after the new regime takes effect and electing the annual property tax. Their savings after paying that new tax range between $32,492 and $411,075 over 10-20 years.
A current owner of taxable property with an aggregate unimproved value exceeding the premium rate land tax threshold - will substantially benefit by purchasing the property after the new regime takes effect and electing the annual property tax. Their savings after paying the new tax range between $52,263 and $631,789 over 10-20 years.
Within the next month, we will issue an article with our comparative calculations for a prospective purchaser of commercial property.
Should you require further information, or advice in relation to these matters, please contact our Indirect Tax specialist Stephen Baxter, alternatively, you can contact your usual Mazars advisor via phone or the form below:
Author: Stephen Baxter
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