B Invested

What happens if stamp duty was replaced by a property tax

There has been a spotlight on stamp duty recently, with the NSW Government announcing it was planning to axe it in favour of a yearly tax for property owners.

Soon afterwards, the Victorian Government announced it would slash stamp duty by 50 per cent, in a bid to help stimulate the economy post-pandemic.

Stamp duty has been polarising for years, largely since Sydney and Melbourne experienced booming real estate markets between 2013 and 2018.

What is it?

Stamp duty is a tax on property transactions that must be paid upfront and cannot be rolled into a home loan. Stamp duty on median priced homes in major states and territories usually sets home buyers back between $30,000 and $50,000.

Critics believe it discourages the transfer of property, because when you consider the normal 20 per cent deposit required for a property, buyers are already stumping up hundreds of thousands of dollars in advance. Having to come up with another $30,000 or more would be financially impossible for many Australians, especially with interest rates so low that they get little to no return on money they have accumulated in savings.

It’s creepy

One of the major issues people have with stamp duty comes down to a thing called ‘bracket creep’.

This being because, in some states, the price brackets used to calculate stamp duty were set more than three decades ago.

Take NSW for example. Back in 1986, it was decided that homes bought for $300,000 or less would incur stamp duty of 2%; homes between $300,000 and $1 million would attract stamp duty of a rolling rate between 2% and 4%; and purchases of more than $1 million would be paying above 4%.

This was designed to tax only the wealthiest property buyers. The average house price in Sydney back then was less than $100,000.

But those same brackets haven’t changed and, now, most people in Sydney are paying the maximum level of stamp duty.

A tax on their house!

Investors with multiple properties in their portfolio are no strangers to getting stung on stamp duty. And one of the worst parts is that it’s not tax deductible! Down the track it can be taken into account when calculating capital gains tax, but that’s not very useful if you plan to hold your properties and never sell.

So it’s all well and good for governments to jump in and take a slice of the wealth you are creating – as always – but if there are less people prepared to buy property as a result, there will be less taxes to collect, so it’s important the powers that be strike a balance with the system they implement.

So what’s the alternative?

One plan is to scrap stamp duty and replace it with a yearly property tax, which is more manageable at the time for the homeowner, without being prohibitive. And of course, the length of time the tax must be paid makes it more lucrative for the government.

Stamp duty concessions for first home buyers would be replaced with a grant and other owner-occupiers and investors would have the choice between paying stamp duty as normal or the new option.

There are no plans at this stage to backdate the tax for properties already purchased.

However, instead of paying something that takes on average less than three years to save (stamp duty), you’ll find yourself paying tax to the government year after year as long as you live in the family home, or are holding an investment property. Even when you’ve paid off the value of the property.

As with all policies, they can be massaged or manipulated as time goes by and economic conditions change, so you will eventually find your property tax raised, or maybe backdated. There are lots of grey areas. And most of these measured end up being worse for investors than owner-occupiers, so expect higher rates of tax.

Stick with your strategy

Most Binvested clients target properties at the affordable end, which means your stamp duty, while painful and hard to cop, will not be as bad as for those buying expensive family homes.

It may actually be more manageable for investors to get together a one-off stamp duty payment upfront, than to pay ongoing tax on 10 or more properties in a portfolio for ever and ever. And there still hasn’t been any talk about tax deductibility yet. So if a stamp duty alternative becomes available in your state or territory, don’t just jump on board. Get the right independent advice and make sure you make an informed decision.


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