NSW reforms stamp duty, but other states unwilling to follow

As of January 16, first home buyers in New South Wales can choose between making a one-off stamp duty payment or paying an annual property tax.

Under the First Home Buyer Choice scheme, the annual land tax is:

• Owner-occupiers = $400 plus 0.3% of the land value (not property value)
• Investors = $1,500 plus 1.1% of the land value (not property value)

By contrast, a first-home buyer would have to pay $40,090 upfront in stamp duty if they purchased a $1 million property.

For most first-home buyers, paying stamp duty would make sense only if they ended up staying in the home for several decades; otherwise, choosing the annual land tax would end up being cheaper.

The case against stamp duty

Many economists oppose stamp duty, because it dissuades people from moving when they want to, which in turn disrupts economic activity. Instead, they prefer annual property taxes.

Many state governments prefer property taxes for the same reason. However, they’ve historically been reluctant to phase out stamp duty, because it makes such a significant contribution to their budget. A property tax, if designed properly, could ultimately bring in the same amount of revenue – but only after a transition period of many years. In the meantime, governments would face budget shortfalls.

The ACT is phasing out stamp duty

That said, New South Wales is actually the second state / territory to make serious stamp duty reform.

In 2012, the ACT began a 20-year plan to phase out stamp duty and replace it with a rates system in which everyone pays – either directly if you’re a homeowner or indirectly if you’re a tenant (by the landlord passing on their rates in the form of higher rents). 

The ACT regards this system as fairer and more efficient. Also, this system is expected to provide the government with a more reliable revenue stream, as stamp duty can fluctuate significantly from year to year based on what’s happening in the property market.

Stamp duty v property tax

A recent article by the Grattan Institute, a think tank, noted that apart from the ACT and New South Wales, no other jurisdictions are currently looking at removing stamp duty.

The reason is financial. 

"Stamp duty is critical to helping state governments pay the bills. All states or territories, except the ACT, use them to collect at least one-fifth of their tax revenue … To really get rid of stamp duty altogether, we need to replace it with something else. Land tax is a good candidate because it doesn’t distort people’s decisions."