With NSW taking the lead in what has been described as ‘the biggest Tax Reform since Federation’ residential Stamp Duty is in for a shake-up in favour of a proposed annual Land Tax.
The need for Stamp Duty reform has been debated for many years, however I suggest that the apartment sector and the potential for job-creation needs more work. While the reform would remove a major up-front cost for some buyers, the link between creating jobs and increased home ownership is not clear.
I also suggest that the idea of a higher rate and deductibility limits for investment properties are points that deserve more debate. While another plank of the new policy; a buyer’s choice between Stamp Duty or Land Tax highlights some concerns for apartment buyers.
The choice between Stamp Duty or Land Tax would stay with the property including subsequent sales. It would not be possible to switch between taxes and this point needs more clarification as to how apartments might be treated, in particular how off-the-plan (OTP) buyers would fare.
The proposed Land Tax would be based around the unimproved residential land values. In NSW land values are currently not identified for the purposes of assessing Stamp Duty for OTP sales, and this puts every OTP buyer in NSW at a disadvantage by comparison with other states.
Stamp Duty in NSW for most new OTP apartment buyers is currently paid upfront and this can greatly impact the appeal and rate of sales. This poses the question as to how and when apartment buyers would select Stamp Duty or Land Tax is further complicated because varied rates will apply to investors?
I also think there could be issues relating to the attributions of common property, and associated tax liabilities. Not to mention the complexity of how and how often land values will be assessed.
The changes were announced as part of a budget that has tax reform and job creation as central themes. Appreciating that construction is a major employer, I suggest that the changes do not appear to directly encourage more apartment projects and more jobs.
Unlike the incentives announced for Victoria, where Transfer Duty will be immediately reduced, NSW may have to wait for at least 12-months or more. A fact that will further delay the economic benefits.
As far as new apartment projects are concerned, the potential creation of more jobs may be a missed opportunity. The reason being that OTP sales rely upon pre-sales to secure finance and the current reforms do little to help.
If the reforms fail to address apartment developments and fail to address long-running stamp duty issues around OTP apartments in particular, then developers may delay the start of new projects, even those with current approvals. And that’s something that the construction sector can ill afford.
At the core of my concerns is the distortions caused by how duty is charged on the total price of an apartment, and not on the existing improved value of the land. Reforms need to examine options for not accessing duty on the end-value of apartments. While details are far from concrete my concerns are that OTP buyers appear to be forgotten in this discussion, let’s take the following currently hypothetical example.
Assume two apartment sales at both the lower and upper-ends; $810,000 and $1,805,000 and adopting an assumed common attribute land value.
For the first apartment at $810,000 the current Stamp Duty would be $32,078. If we adopt an assumed land value of $260,820, the notional land tax amount would be $1,282pa. However, based on the contract price the proposed land tax would be $2,930pa.
On the more expensive apartment price of $1,805,000, the current Stamp Duty $84,573. However, on an assumed land value $581,210, the notional land would be $2,243pa. While based on the contract price land tax would be $5,915. [In both examples the assumption the new Land Tax RATE at 0.3% plus $500.]
Split contracts for House & Land packages further highlight the disadvantages for OTP apartment buyers and reinforces in my view that change looks long overdue.
Any broad-base Land Tax would also take away the churn-payment buyers face every time a sale occurs. However, on a positive note, according to the Treasurer an estimated $11 billion in reform benefit would flow to the NSW economy over the 4-years after the policy switch.
Here again, a change of policy for new apartments I feel would further and more immediately boost economic activity.
This ‘Buyer’s Choice Tax’ looks a good idea but where OTP apartments are concerned needs some greater detail.
I’m suggesting that the proposed policy needs to take into account the fact that many more people now live in apartments where land values are very complex. And this further fails to address what happens when values fall, and the big variation in land values between different size projects.
Hopefully, a transition the new policy can be introduced quickly. Where again Victoria has a more immediate advantage.
However, the review needs to be a 360 degree policy that creates employment, removes concerns around OTP apartments and also existing homes, while helping to stabilise government revenues.