NSW Changes to Property Taxes – 5 top tips

The 2022-2023 NSW Budget, handed down on midday Tuesday 21 June 2022, announced one of the largest reforms to property taxation in NSW for a generation.  

In our last article, important changes were also made to the Duties Act 1997 (NSW) (Duties Act), the Land Tax Act 1956 (NSW) (Land Tax Act) and the Taxation Administration Act 1996 (NSW). On 19 May 2022, the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (Act) received Royal Assent and is the commencement date for the provisions.

How will the changes impact your clients’ property dealings? Here are our top 5 tips:

1. First Home Buyer Choice scheme

Under the new First Home Buyer Choice scheme, a first home buyer purchasing a property up to the purchase price of $1.5 million will have the choice to pay an annual property tax instead of an upfront duty. This is a different proposition to last year’s property tax reforms (outlined in our previous article), as the scheme is limited to first home buyers and the property will not be locked into the scheme once it is sold.

Eligibility is available for individuals who are Australian Citizens (or permanent residents) over the age of 18 years old and they or their spouse have not previously owned or co-owned residential property in Australia.

The annual property tax payments will be based on the unimproved value of land determined by the Valuer General with property tax assessments issued each financial year. Similar to the existing land tax regime, if you disagree with the taxable land value you can object to the Valuer General's Office [1]. 

The property tax rates will be indexed each year, so that the average property tax payment rises in line with average incomes. For 2022-23, the rates will be:

• $400 plus 0.3 per cent of land value for properties whose owners live in them; and

• $1,500 plus 1.1 per cent of land value for investment properties.

A pro rata adjustment will be made based on the number of days in the year the property is owned where it is held for less than a full financial year.

Eligible first-home buyers will be able to opt-in to the scheme from 16 January 2023. For contracts exchanged in the period between enactment of the legislation and 15 January 2023 eligible first-home buyers will be able to receive a refund of duty already paid.

First-home buyers will continue to be eligible to apply for full duty exemption for properties up to $650,000 and concessions between $650,000 and $800,000. The Principal Place of Residence (PPR) land tax exemption will also apply where owners live in the property continuously for six months.

After the enactment of the legislation, a property tax calculator will be available through Service NSW to help first home buyers to opt-in to property tax. 

Revenue NSW have also published the NSW transfer duty thresholds and rates applying from 1 July 2022:

• the maximum General Rate of transfer duty of 5.5% will apply to dutiable value over $1.089 million (being $44,095 + 5.5% of excess over $1.089 million); and  

• the Premium Rate of transfer duty of 7% for residential land will apply to dutiable value over $3.268 million (being $163,940 + 7% of excess over $3.268 million).

2. Equity Scheme

The NSW State Government is also launching a shared equity trial scheme to make first time home ownership more achievable for single parents, singles over 50, nurses, teachers, and police officers enter the housing market.

The Government will contribute an equity share up to 40% for a new property or up to 30% for an existing property under $950,000 in Sydney and major regional centres (Newcastle, Lake Macquarie, Illawarra, Central Coast, North Coast of NSW) or less than $600,000 in other regional areas.

The gross income of the household must be no more than $90,000 for singles and $120,000 for couples and the participant must have a minimum deposit of 2%of the purchase price.

3. Foreign surcharge for land tax increased from 2% to 4%

The NSW State Government has also announced in its 2022 – 2023 Budget that it will increase the land tax surcharge from 2% to 4%. Australian citizens are not subject to foreign surcharges regardless of where they live in the world. In our previous articles, we have highlighted the sting caused by foreign surcharge land tax on:

• permanent residents, and New Zealand citizens holding subclass 444 visas, who have not physically been in Australia for 200 days or more in that calendar year; or

• all other visa type holders (including New Zealand citizens on subclass 461 visas) regardless of if they have been physically in Australia for 200 days or more; or

• discretionary trusts without an exclusion for foreign persons.

Individuals or trusts who may fall within one of the above bullet points will need to take additional care to avoid the proposed increased sting. The Commissioner of State Revenue has powers to issue assessments for the previous 5 years.  

If this applies to you or your client, you should consider  selling or transferring all or part of the property to a non-foreign person under a duty exemption or property tax above. This may reduce the annual foreign surcharge land tax exposure and satisfy the requirements for PPR land tax exemption.

4. Changes to beneficial ownership – Options are dutiable

The Act introduced new section 8(1)(b)(ix) into the Duties Act, which imposes duty on transactions that result in a change in beneficial ownership of dutiable property, other than an “excluded transaction”. The new section 8(3) sets out several excluded transactions and provides, under s 8(3)(k), the ability to exclude additional transactions. The regulations to the Act are expected to be released shortly to add further exclusions to the current list.

One major change, as confirmed by Revenue NSW’s Legislative Amendment Act 2022 Technical Guide (the Technical Guide) is that the grant of an option is now subject to duty.

The Technical Guide states that duty paid on the call option fee will not be credited towards any duty payable when it is exercised. There is no refund available if the call option is not exercised. A put option fee is not liable to duty and does not form part of the consideration.

5. Foreign property developer refund for surcharges

The Act also makes amendments to Section 104ZJA of the Duties Act and Section 5C of the Land Tax Act, to extend the refund of surcharge purchaser duty or land tax for certain Australian based developers.

The refund is available if, after a transfer of residential land, the land is used by the purchaser (or related party) wholly or predominately for commercial or industrial purposes.

Application for a refund needs to be made within 12 months of the entitling event or within 10 years from the date of purchase of the property.

These are welcome changes for property developers who acquired residential land after 21 June 2016, as their development plans will no longer be subject to surcharge taxes.

See also CPN 023 and Revenue Ruling G013 (which will be updated to reflect these changes).

For advice or assistance on structuring your or your clients’ next property purchase or available State or Federal tax concessions or exemptions, please contact us.

Authors: Lisa To & Hayley Constantine

[1] section 34 of the Valuation of Land Act 1916