The NSW Government released its 2022-2023 State Budget yesterday.

The budget included the following revenue measures relevant to our clients:

• an annual property tax option for first home buyers
• increase in surcharge land tax for foreign owners.

Annual Property Tax

The State Government has finally announced the broad details of its proposed new property tax, which will give eligible first home buyers the choice to either pay transfer duty or an annual property tax. This may be viewed by some as a scaling back of Mr Perrottet ambitions for his much heralded new property tax. Previous announcements had indicated that the choice may be more broadly available to a range of purchasers of residential, commercial and agricultural properties, whereas the current announcement limits the choice to first home buyers and will be capped at properties valued at up to AU$1.5 million.

The main features of the annual property tax are:

• The annual property tax will be calculated on the unimproved land value rather than the amount paid for the property. This unimproved land value is the land value used for rates and land tax purposes.
• While the first home buyer lives in the property as an owner-occupier, the annual tax will initially be set at AU$400 + 0.3% of the unimproved land value.
• If the first home buyer decides to move out, this will change the status of the property to that of a ‘residential investment property’ and cause the annual tax to increase to AU$1,500 + 1.1% of the unimproved land value.
• If the first home buyer moves back into the property, the rate will return to an owner-occupier rate.
• The rate will be indexed and so may change over time (based on the increase in Gross State Product per person in NSW).
• Properties will not be ‘locked in’ to the annual property tax for subsequent purchasers. This is contrary to previous announcements and ensures that subsequent buyers will pay transfer duty on any future acquisitions of that property (unless that subsequent buyer qualifies and as an eligible first home buyer and chooses the annual property tax).

It is proposed that the annual property tax will commence on 16 January 2023, applying from the date of settlement of the contract. For contracts exchanged between the enactment of legislation and 15 January 2023, eligible first home buyers can opt into the annual property tax and apply for a refund of transfer duty paid on their acquisition.

Financial institutions will be pleased by the Government’s announcement that no one facing hardship will be required to sell their home to meet property tax liabilities. However, we will await further details as to whether the annual property tax will give rise to a first ranking charge over the land.

The existing first home buyer assistance scheme will remain in place (ie. for properties up to AU$650,000 and at concessional rate for properties between AU$650,000 to AU$800,000). Buyers eligible for that concession will not be forced to adopt the annual property tax.

Foreign owner surcharge land tax to increase

The rate of foreign owner surcharge land tax will increase from 2% to 4% from the 2023 land tax year (from 1 Jan 2023). This increased burden on foreign owners of residential land will force more foreign persons to look for alternative investments (such as commercial land).