Specialist Corporate and Commercial Lawyers
First Home Buyer Choice – Should First Home Buyers Opt In?
On 11 November 2022, the Property Tax (First Home Buyer Choice) Bill 2022 received royal assent, spelling out a whole a new chapter for first home property ownership in New South Wales. The Property Tax (First Home Buyer Choice) Act 2022 (NSW) (Act) will apply to properties purchased for $1.5 million or less (other than vacant land) and settled on or after 16 January 2023. The scheme will allow first home buyers to elect to pay an annual property tax (FHB Tax) instead of paying stamp duty on or before settlement of the purchase of their first home.
For contracts exchanged on or after 11 November 2022:
- If settlement occurs on or before 15 January 2023, stamp duty is required to be paid up front, but first home buyers can obtain a refund after 16 January 2023 if they wish to opt into the scheme.
- If settlement occurs on or after 16 January 2023, first home buyers can opt into the scheme without having to pay stamp duty up front.
If contracts were exchanged prior to 11 November 2022, first-home buyers are stuck with paying stamp duty on or before settlement of their purchase.
Although the absence of stamp duty on the purchase of a first home sounds appealing, is it really in the best interests of first home buyers in the long-term? Under the current First Home Buyers Assistance Scheme (FHBAS), properties that are purchased for $650,000.00 or less are exempt from stamp duty. For properties with a purchase price between $650,000.00 and $800,000.00, first home buyers receive a concessional stamp duty assessment. Given these already existing exemptions and concessions, is it better to opt in for the FHB Tax right away instead of paying a concessional rate of duty up front?
If a first home buyer opts in for the FHB Tax, it will be levied on 1 July each year, and the amount payable will depend on:
- the value of the land (as determined by the Valuer General); and
- the class of land use, being either:
- owner occupied – where FHB Tax is levied at a rate of $400 plus 0.3% of the land value up until 2024; and
- non owner occupied – where FHB Tax is levied at a higher rate of $1,500 plus 1.1% of the land value up until 2024.
Generally, the closer a first home buyer is to a purchase price of $650,000.00, the less appealing the FHB Tax becomes. This is because the FHB Tax will be more over the long term in comparison to paying a concessional rate of stamp duty up front, especially in circumstances where the purchaser intends to reside in the property for an extended period of time. However, the closer the purchase price is to $1.5 million, the more appealing the FHB Tax becomes, particularly in circumstances where the purchaser receives no concessional treatment due to the purchase price being above $800,000.00 and the first home buyer plans on selling the property in the short-to-medium-term.
For example, on the purchase of a $670,000 property with a land value of $266,400.00, stamp duty with the FHBAS concession would be $4,165.00, and the FHB Tax would be $1,200.00 per annum. Over 4 years, the FHB Tax will be more expensive, so a first home buyer intending to remain in the property for more than four years would find the FHBAS concession more appealing.
However, on the purchase of a $1,500,000.00 property with a land value of $643,000.00, the stamp duty payable would be $66,720.00, and the FHB Tax would be $2,329.00 per annum. This means it would take over 27 years for the FHB Tax to become more expensive, making it the more appealing option.
The above examples do not account for the non-owner occupied rate, inflation or increases to the FHB Tax in the future.
First home buyers that opt in for the FHB Tax will be registered as an “included owner” on settlement of their purchase under the new legislative scheme. This means they will be liable to pay (after receiving a notice of assessment) the FHB Tax either in full or quarterly instalments at the beginning of each financial year. The FHB Tax is payable from the date of the purchase until such time that the property is sold (even if the first home buyer buys a second property to reside in and uses the original property as an investment property).
If a first home buyer wishes to subsequently sell their property, the normal stamp duty rules will apply and the subsequent owner will not be liable to pay the FHB Tax, unless they are also a first home buyer who has opted into the scheme.
Although the FHB Tax has its benefits, it may increase significantly over time, which has been the primary concern of the scheme. In addition, failure to pay the FHB Tax can have serious consequences, including interest and penalty tax on any unpaid amounts. This often results in tax defaults and can affect a person’s ability to borrow money. Although there is this risk, first home buyers cannot be forced to sell their principal place of residence to meet any outstanding FHB Tax liability.
One of the most interesting aspects of the new legislation is how the New South Wales Government has approached potential increases in the FHB Tax in the future. This has been the subject of recent debate between the New South Wales divisions of the Liberal Party of Australia and the Australian Labour Party.
The provisions of the Act recommend that property tax should not be increased in the future above the indexed amounts set out in the Act. However, this is only a recommendation, and nothing more. There is no prohibition on the increase of the FHB Tax above indexed rates, which means the scheme may be less appealing in the long-term and is something first home buyers will need to be aware of. Although there is no prohibition on any increases above the indexed rates in the Act, the New South Wales Government is required to follow procedure to inform the public prior to any increases above the indexed rates, which will no doubt be opposed in the future and shrouded in controversy.
Whether the FHB Tax is right for a first home buyer will depend on a range of factors. It will be interesting to see how the new scheme operates in practice and whether it is beneficial in the long- term. It is important that first home buyers obtain advice from a qualified professional to ensure they understand the full extent of the scheme and their obligations under it before opting in.
This article was co-written by Jack Harman, Lawyer.