Is this the end for Stamp Duty in New South Wales?
In the New South Wales Budget handed down on 21 June 2022, the State Government has announced plans to make some transfer duty optional from January 2023. This is consistent with its policy for the abolition of stamp duty introduced in its 2020 Consultation Paper. However, the scope of the proposal is quite limited at this stage. Although these changes could be the beginning of the most significant reform to stamp duty law in New South Wales in over 150 years, media reports about the imminent abolition of stamp duty in favour of a broad based property tax are greatly exaggerated. In reality, a complex web of duty traps remains to ensnare the unwary for the foreseeable future.
The Evolution of NSW stamp duty
Stamp duty was first imposed in New South Wales in 1865. Since that time there have been some significant reforms, including the rewrite of the legislation with the Duties Act 1997, which removed the "stamp" from stamp duty and converted stamp duty from a duty on documents to a duty on transactions. Do you even remember the short-lived frolic with Vendor duty which was abolished in 2005? That’s right - it was duty imposed on vendors of land.
Following the introduction of the Goods & Services Tax in 2000 (revenue from which flows to the States), many of the heads of duty have been abolished including hire of goods duty, lease duty, mortgage duty in different stages, duty on unlisted marketable securities (i.e. shares and units), as well as most recently duty on statutory licensing, gaming and machine entitlements and transfers of business assets except land. Not much left to worry about then, you might be thinking. Well think again.
Despite the significant reductions in the scope of duty over the last 2 decades, duty on transfers of land and interests in land have provided a foundation for the State's revenue, duty revenue yielding over 12.2 billion dollars in the 10 months to April 2022. This is largely attributable to "bracket creep" with the progressive rates at which duty is calculated only indexed to CPI annually since 1 July 2019.
The policy for abolition
Treasury's 2020 Consultation Paper and 2021 Progress Paper proposed the introduction of a widespread option to either choose paying duty on land acquisitions or an annual property tax with varying rates depending on the nature and use of the land. Reportedly, high value properties were to be excluded from the option to protect the loss of revenue. Critically, under the original proposal once the property tax option had been elected, future buyers would have no option but to be bound by the annual property tax. In this way, over a period of decades gradually the stamp duty would be phased out and a broad based annual property tax introduced. A similar system has been in place in the ACT for a decade.
The measures as announced in the Budget
The June State Budget announcements for the First Home Buyer Choice scheme were a long way from the policy as proposed during the consultation phase, and the key features are:
The option as announced is only open to eligible First Home Buyers, who enter into a purchase contract on or after 16 January 2023.
There will be a higher rate of annual property tax for investors ($1,500 plus 1.1% of land value) than for owner occupiers ($400 plus 0.3%). These rates will be indexed annually to wage growth.
The tax will be based on a financial year unlike land tax which is based on a calendar year.
The property value must not exceed $1,500,000.
The existing First Home Buyers Assistance Scheme duty concessions for properties valued up to $800,000 will remain. Under the scheme duty is exempt up to $650,000 and the concession phases out up to $800,000. Buyers above $650,000 will have the option to pay the concessional duty or choose to be subject to the annual property tax.
Guidance from the New South Wales Government suggests that upon sale by those who elected the property tax option, the purchaser would be subject to normal duty unless they too are an eligible First Home Buyer or Buyers.
Of course, legislation must first be enacted and the details remain to be seen, including the transitional provisions that will apply.
As seen by the ACT example, even a widespread introduction would be expected to take up to 20 years before transfer duty would be completely replaced by an annual property tax. So, with antipathy from the opposition, a looming State election soon after the proposed introduction, and the reported need for interim Federal Government revenue shortfall support, the full introduction of optional duty seems a long way off.
Duty issues and complexity remain
Meanwhile, despite various changes to stamp duty over recent decades, complexity remains in the area of duty arising from various exemptions and concessions for first home buyers, deceased estates, and marital transfers and breakdowns, the availability of which is closely regulated by Revenue NSW.
Ask yourself this simple question: are goods subject to duty? Goods are generally not liable for duty, but sometimes they can be, unless they are certain types of goods which are always excluded!
The concept of land is also so much broader than the simple freehold title definition which people often assume. For example duty also applies on the transfer of leases and the payment of lease premiums.
Take care that adequate measures have been taken before changing the trustee of trusts which hold dutiable property such as land, lest the new trustee receives an invoice from Revenue NSW as though it had just purchased all the land in the trust fund.
Landholder duty (an anti-avoidance provision) is notoriously complex and can unexpectedly result in significant duty on a change in shareholding in a company or unitholding in a trust.
Recent years have seen the introduction of foreign person surcharge duty which also adds a further layer of complexity to duty law including landholder duty. Foreign person surcharge duty can result in duty payable on a residential property valued at $3 million or more calculated at a total rate of duty (including the surcharge) of 15% of the purchase price of the property. That is duty of $450,000 on a three $3 million dollar purchase price. While the rate of surcharge duty was not increased in the State Budget, the land tax surcharge is set to be increased from 2% to 4%.
More complexity in the area of duty law was introduced prior to the Budget with amendments to the Duties Act which came into effect on 19 May 2022. These changes impose duty on a change in beneficial interest in dutiable property. This has resulted in the introduction of duty on call options among other duty exposures.
The Budget announcements introduce another regime into the mix and merely add to the existing complexity. If the announcements become law, by next January we will have the existing transfer duty regime, the existing land tax regime and new annual property tax all running in parallel.
Duty also remains on declarations of trust, creating a life interest, foreclosing a mortgage over NSW property, insurance premiums and transfers of motor vehicles.
So is duty dying in NSW? Despite the proposed optional stamp duty changes under First Home Buyer Choice, the complex world of New South Wales Duty Law remains alive and well, ready to be imposed by an enhanced Revenue NSW compliance team, bolstered by further funding also announced in the fine print of the Budget Papers.
If you or your clients require advice on any New South Wales Duty issue or any other area of State Tax Law please contact Michael Malanos or one of our other Tax Partners.
The material in this article was correct at the time of publication and has been prepared for information purposes only. It should not be taken to be specific advice or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained in this article.
contact
Michael Malanos
Partner
E mlm@bwslawyers.com.au
P 02 9394 1024