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Calls for NSW property tax to play a role in HEM

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Malavika Santhebennur 7 minute read

An NSW government progress paper on its property tax proposals has included feedback that the annual property tax would need to be considered in determining loan serviceability.

In November 2020, the NSW government launched a public consultation as part of the NSW 2020-21 budget on enabling home buyers to opt out of stamp duty and instead choose an annual property tax.

The consultation aimed to seek the community’s view on tax reform to reduce the upfront cost for home buyers and remove “one of the biggest financial barriers to home ownership”.

The proposed model would give buyers a choice to axe stamp duty at the point of purchase and choose an annual property charge instead.


The consultation process outlined a proposed model that would replace the current stamp duty concessions provided to first home buyers (FHB) with a new grant, among other measures.

Calls to account for property tax in HEM

NSW Treasurer Dominic Perrottet has now released a progress paper on the government’s property tax proposal, which has compiled feedback and submissions from the community and stakeholders received over the past six months.

Mr Perrottet said the NSW Treasury “Have Your Say” website received 57 detailed submissions from industry stakeholders and 196 community submissions.

The government received feedback from several financial institutions and the Tax Institute about allowing buyers to opt out of stamp duty and choose an annual property tax instead, saying that the property tax would need to be considered in determining a borrower’s capacity to repay their loan (loan serviceability).


The progress paper said: “Lenders would take property tax payments into account as part of their household expenditure measure (HEM) when determining maximum lending limits, which will minimise the pricing impact of property reform on driving up bidding in auctions.

“Any savings made by opting in to property tax will therefore be unlikely to translate to an increase in property prices.”

In its submission, the Tax Institute said that it would expect that taking the annual property tax into account to determine loan serviceability from a borrower would reduce their borrowing capacity (due to reduced after-tax income position resulting from the annual property tax cost), compared with their borrowing capacity if their property was liable to stamp duty.

It said: “The overall effect of this should be that a stamp duty purchaser and a property tax purchaser should be able to borrow equivalent amounts with neither category of purchaser worse off in that regard.”

NSW FHBs to be given $25,000 grant

In the progress paper, the NSW government has stated that for FHBs, existing stamp duty concessions would be replaced with a grant of up to $25,000.

Meanwhile, price thresholds would limit the number of properties initially eligible for transition to keep government revenue and debt impacts within reasonable levels, while ensuring that over 80 per cent of residential properties are eligible to opt in from day one, the paper stated.

It also stated that there would be protections in place so that a hardship scheme would recognise that taxpayers’ financial situations could change over time, and as such, would ensure that borrowers facing hardship would not be required to sell their home to meet property tax liabilities.

Reforms could trigger short-term house price hike: submissions

Other participants who offered feedback to the consultation provided mixed views on how the property tax could impact ongoing housing affordability in NSW, with some industry stakeholders and members suggesting that removing stamp duty would cause upward pressure on prices due to an increase in spending power.

For example, the McKell Institute submission stated that the introduction of the property tax may place upward pressure on property prices in the short-term but added that “the reduction in stamp duty costs will still result in a net positive effect on housing affordability”.

The Law Society of NSW Young Lawyers stated in its submission that removing stamp duty in favour of the annual property tax may result in higher property prices in the short term.

It said: “Stamp duty was a potential cost calculated into the price of properties, the removal of such a cost would increase their borrowing power.”

However, according to the progress paper, others noted that the tax system is one of several factors that influence housing prices, with record-low interest rates playing a significant role in the current price surges.

Other factors included in the paper are migration, delayed purchases during the coronavirus pandemic in 2020, serviceability calculations, and supply and demand.

The paper said the reforms would generate higher rates of home ownership due to several factors, including lower upfront costs that would particularly benefit FHBs who typically have had less time than other purchasers to save for a deposit.

Commenting on the progress paper, Mr Perrottet said: “The first round of consultation and submissions showed 84 per cent of people believe stamp duty reform is needed and two-thirds of the community said stamp duty was a significant barrier to home ownership.

“Making changes to the property tax system is highly complex, and we want to make sure we get this right. We will continue to listen to the community and invite further feedback on the additional information contained in the progress paper over the coming weeks.”

[Related: Stamp duty reform ‘right thing to do’: RBA]

Calls for NSW property tax to play a role in HEM
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Malavika Santhebennur

Malavika Santhebennur

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.


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