What Is Stamp Duty And Will Getting Rid Of It Actually Help?

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From January 2023 first home buyers in NSW will be able to choose between stamp duty or an annual property tax.

Let’s just pretend for a second that we could finally, one day, afford to buy a property in Sydney. We’d browse Domain and realestate.com.au, scroll through pages and pages of listings, occasionally indulging our fantasies by just looking at some of the really nice places.

And say we pluck a number out of the air and find a home that costs $700,000. Which, by the way, is nowhere near the median home price in Sydney — it’s actually more like 1.6 million. But let’s just keep going. The recommended 20 percent deposit is $140,000, or $70,000 for a 10 percent deposit but you’d also need to get Lenders Mortgage Insurance. 

But let’s say you’ve listened to all the advice, scrimped and saved everything, and managed to get that 140k deposit. Which again, by the way, if you save the average in Australia of $800 per month, it would take about 14 years.

But moving on — we made it! Except for the fact that you also have to pay stamp duty.

What Is Stamp Duty?

Stamp duty is the tax that you pay for buying a property. Its name comes from a physical stamp that used to be put on documents to show that this tax was paid and the sale was legit. In Australia, every state has slightly different calculations of stamp duty, but it’s generally around 3-4% of the property amount. 

From July 2022, NSW will calculate stamp duty as $9,805 plus $4.50 for every $100 over $327,000. So for our imaginary $700,000 fantasy home in Sydney, that’s around $27,000

It’s a cost that adds a hefty amount to an already massive job of saving for a deposit. But there are some schemes in place that can ease that cost, including the new proposal to scrap it altogether and replace it with an annual property tax.

Is NSW Getting Rid Of Stamp Duty?

NSW Premier Dominic Perrottet has been keen on getting rid of stamp duty since 2020 when he was Treasurer. He’s called it one of the largest upfront costs to buying a home and instead wants to replace it with an annual property tax. This would be more affordable since it’s split over many years, rather than a lump sum at the start. But is it actually cheaper?

The annual amount is calculated as $400 plus 0.3 percent of the land value if you live in the house, and $1.5k plus 1.1 percent if you don’t. And note that land value is different to the house value. It’s usually less than the entire property value, and depends on things like where the land is, the size and shape, and any zoning or heritage restrictions.

According to Domain, the ideal land-to-asset ratio is 50 percent as a minimum, meaning our $700,000 home could have a land value of $350,000, giving us an annual property tax of $1,450. There’s also a list of stamp duty compared to property tax on the NSW government site.

What About The Existing First Home Buyer Schemes?

The crossover with existing schemes for first home buyers is where things might get a bit confusing.

You can opt in to this annual property tax option on homes up to 1.5 million dollars. Or you can choose to pay stamp duty and benefit from the First Home Buyer Assistance Scheme, which waives stamp duty completely on homes up to $650k, and a reduced amount up to $800k. So it depends on the cost of the property you’re planning to buy.

Using our imaginary $700k Sydney home example, stamp duty would be reduced to around $10k rather than $27k under the First Home Buyer scheme. Or you could opt in to the annual property tax instead and pay a smaller amount every year.

This whole process is now called the First Home Buyer Choice. It’ll be introduced into NSW parliament later this year and in place on January 16 2023. People who buy while it’s in Parliament have the option to opt in after Jan 16th, but will have to pay stamp duty first then apply for a refund after that date.

It should help reduce that extra barrier in an already inaccessible market. But one big criticism is that property taxes could keep increasing every year. Stamp duty, on the other hand, is one upfront cost.

We’re also facing things like lettuce becoming a luxury item and the RBA wanting us to cop a pay cut. So even with a carrot dangling in front of us with a potential promise to enter the market, it’s hard to get too excited.