For most people, buying their first home is a huge challenge, both financially and personally. With the cost of the “average” home in New South Wales exceeding a million dollars, saving a 20% deposit is itself a substantial undertaking, usually requiring years of sacrifice. The deposit is not the only amount that buyers in New South Wales must find prior to purchasing a home. There are a number of additional costs, including building and pest inspections, conveyancing fees, mortgage registration, transfer fees and, most significantly, transfer duty.

A new scheme has been introduced in New South Wales designed to make home ownership more obtainable for first home buyers by offering the option to replace the one-off transfer duty with an annual property tax. However, buyers should be cautious in opting into this scheme. This article examines the pros and cons of the First Home Buyers Choice scheme. The information is for general purposes only and we recommend obtaining professional advice relevant to your circumstances.

What is Transfer Duty?

Transfer duty is a state government tax. It is paid on all property purchases and is calculated on the sale price or the current market value of the property, whichever is higher. The “average” New South Wales home attracts duty in the region of $40,000.

First home buyers of any primary residence (including new homes, existing homes, and vacant land to build a home) can apply for full duty exemption for properties valued at up to $650,000 (and up to $350,000 for land).

In addition, first home buyers of homes in the range of $650,000 up to $800,000 (and between $350,000 and $450,000 for vacant land) can benefit from a concession rate of duty.

It is important to note that these concessions will continue to apply with the introduction of the First Home Buyers Choice scheme.

First Home Buyer Choice

This scheme gives first home buyers in New South Wales a choice between paying upfront transfer duty or an annual property tax. It is important for consumers to know that, unlike other incentives to help first home buyers (including the continuing First Home Buyers Assistance Scheme and First Home Owners Grant (New Home)), this scheme is not a straight-forward win for all first home buyers.

A buyer is choosing either to pay a given amount as a lump-sum at the time of purchase, or to enter into an ongoing obligation to pay an additional amount of tax each year that they live in the property. The tax does not end when the total repayments exceed the amount that would have been the lump-sum transfer duty. The tax only ends when the home owner sells the property or dies.

First home buyers need to think carefully about which option they wish to pursue, as once they decide (which occurs at the settlement of the purchase) they cannot later change their minds.

How Much is the Property Tax?

The property tax is based on the land value of the property, not the purchase price or market value of the home. In 2022-23 and 2023-24, the land tax will be $400 plus 0.3% of the government land value.

The property tax rates will be annually indexed from 2024-25 to ensure that the average property tax payment grows in line with Gross State Product per capita (a measure of average income). Over the past 15 years, GSP per capita has grown at an average annual rate of 3.2 per cent. The legislation provides that the property tax on an individual property can never grow by more than 4 per cent from one year to the next.

Who Can Access the Scheme?

Only first home buyers are eligible for the First Home Buyers Choice scheme. All purchasers must have never owned or co-owned residential property in Australia and never received a first home buyer exemption or concession.

The scheme only applies to purchases of homes valued up to $1,500,000 and vacant land valued up to $800,000. To remain eligible for first home buyer property tax, a first home buyer must move into the property within 12 months of purchase and live in it for six continuous months.

Who Should Choose the Annual Property Tax?

The financial circumstances for each purchaser are different and we recommend that you obtain professional advice before deciding. In general, first home buyers of homes valued at less than $650,000 should not opt for the annual property tax, as they remain exempt from all duty on their purchase.

Home buyers between $650,000 and $800,000 will continue to receive the concession rate of duty. This will reduce the amount that they need to pay upfront to a more manageable amount. From a purely financial point of view, buyers in this range should only choose the annual property tax over the lower lump sum amount if they intend to stay in the property for a short period.

The calculation for buyers of properties valued at over $800,000 is more complex. The upfront cost of transfer duty is considerable in this range, and the annual property tax may be a more manageable option, especially if the buyer intends to live in the house for the “average” ten-year period.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 6621 8005 or email [email protected].