What is the effect of abolishing stamp duty?

What is the effect of abolishing stamp duty?

In May, Victorian Treasurer Tim Pallas backed NSW Treasurer Dominic Perrottet on the need for tax reform, including his plan to ditch stamp duty. Since then, there has been much talk in the industry about the corollaries of the government abolishing stamp duty. Stamp duty was originally slated to be abandoned in all states when the GST was introduced in 2000. ,

There is currently no date set on when stamp duty reforms will be enacted in NSW; however even before COVID-19 struck, many argued that stamp duty is an ineffective tax and there is speculation that it’s scrapping may be fast-tracked due to the strain on house prices and the economy caused by the pandemic.

The Property Council of Australia supports the move but warns the devil will be in the detail because while initially it sounds like a boon to buyers and the real estate industry at large, it begs the question what revenue-raising measures will take its place? And what are the broader implications of changing the current system?

Erin Giblin of realeastate.com says “While talk of state governments potentially scrapping stamp duty is positive, property experts warn that the tax won’t be scrapped without a replacement, which could possibly be more expensive over the life of your property purchase.”

What is the effect of abolishing stamp duty?

So how might the reformed system work? If the stamp duty is abolished, the NSW government will get their revenue from other sources, and the most likely one is an increase in land tax. So instead of changing how much we pay, the new system will likely change when or how often we pay.

An increase in land tax
Land tax is currently paid by investors based on the value of the land they own. The value of the building or the value of their home is excluded.
For example, if you own a house worth $1,000,000 as an investment and the land itself is worth $500,000, then duty is calculated only on $500,000 and not $1,000,000.
So, the NSW government could charge:
• A flat annual land tax.
• Give an option to either pay stamp duty upfront or annual land tax.

John McGrath, founder and executive director of McGrath, explained that the stamp duty reform proposed by the NSW Government would give buyers a choice. “You can pay an upfront lump sum of about $40,000 on a $1 million purchase (in NSW) or an annual land tax of around $3,000 for every year that you continue to live in the property.” he said.

Housing could become more affordable

Stamp duty is considered an inefficient tax as it impedes workforce mobility and disproportionally impacts vulnerable households.
The vast majority of home buyers rely on mortgages to purchase their homes.
Stamp duty adds significantly to upfront costs, forcing them to borrow more and reducing their purchasing power and increasing the mortgage repayments.
Therefore, if stamp duty is abolished, it could mean:
• Housing could be more affordable.
• Borrowers can increase their purchasing power
• The mortgage repayment amount could decrease.

Whatever the future for the stamp duty tax reforms holds, it is sensible for both buyers and the real estate industry to reduce costs and maintain a rainy day fund to be able to weather any unforeseen downturns in the market.

If you are a decision-maker in a real estate agency and you would like to explore how you can reduce your costs, give our Head of growth Michelle Light a call on 0499 094 220.

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