Stamp duty is back on the agenda with the NSW Government announcing this week that it will press forward with its proposed changes to the tax,. The changes, which involve a gradual movement from a once off stamp duty payment on purchase, to an annual land tax payment, were proposed prior to the pandemic but were put on the backburner until now. This time, the NSW Premier, Dominic Perrottet wants to work with the Federal Government to implement the tax reforms given the significant impact on State Government revenue, estimated to be $2.5 billion a year. 

Given that it is unusual for State Governments to put forward plans that will reduce tax revenue, particularly at a time when debt levels are high, why is Perrottet pushing forward with the changes? 

1. Stamp duty is a major source of revenue but is highly volatile

In 2021, the NSW Government received $9.6 billion from stamp duty and this accounted for 25 per cent of total tax revenue. It was the highest level of stamp duty revenue ever recorded and was driven by particularly strong price growth and property sales in that year. 

Although a major source of revenue, it is highly volatile. In 2020, stamp duty revenue was 28 per cent less. It is possible we will see a similar drop this year. The move to a land tax system, levied on homeowners once a year in a similar way to council rates, will result in lower revenue but that revenue will be more stable.

2. It is a tax on mobility

Stamp duty discourages people from moving to more suitable accommodation. If for example you would like to move for work, it can be a deterrent to taking a new role as it is an additional cost. It also encourages people to “right size” their homes – purchase a home that is suitable for their stage of life.

3. It will increase supply of large family homes

While affordability is the biggest problem facing Australia, the availability of suitable homes is also problematic, particularly larger homes for families. Not having to pay stamp duty would encourage more older Australians to move to more suitable accommodation, freeing up more family homes for those that need them.

4. It will encourage stock turnover

In Sydney, the average stamp duty cost is $50,000. This additional cost is a deterrent from many people selling if they are then looking to buy a new home. This may be because their budget doesn’t allow it, or alternatively makes renovating a home more appealing. Scrapping stamp duty will increase the rate of stock turnover.

5. It will deter people holding on to empty homes

Moving to a land tax system would discourage people from holding on to homes that are vacant. Land tax is effectively a holding cost and if a property isn’t utilised, it will be a deterrent for people who are either not living in a property, or alternatively not leasing it out.

6. It will help first home buyers

Buying a home to live in remains one of the best financial decisions that a person can make. With prices now at record high levels relative to incomes, it is out of reach for many people. Scrapping land tax will make an extra cost that prohibits many first home buyers getting into the market.