Property Tax (First Home Buyer Choice) Act 202217 November 2022
The Property Tax (First Home Buyer Choice) Act 2022 (Tax Act) has now become law. Eligible first home buyers will be able to choose between paying upfront stamp duty or paying an annual property tax until the property is sold.
Where the purchaser elects to pay the annual property tax, the tax is dealt with in this completely new Tax Act.
Only first home buyers as defined in s 5 of the Tax Act are eligible.
The person must be an individual over 18 years of age who has not previously owned residential land in Australia either solely or with another person. As well, the person’s spouse must not have owned residential land in Australia either solely or with another person.
The person must also be an Australian citizen or permanent resident.
There are exclusions where prior ownership has been in a particular capacity, such as ownership as an executor of an estate.
Land is as defined in s 6 and includes a lot and strata parcel. The Tax Act also applies to exclusive land use entitlements and Crown lease type of property ownership.
Residential land is defined in s 9. It applies to land suitable for occupation or use as a dwelling, as a building or a strata.
Also included are apparent purchaser provisions under the approved trust provisions in s 10.
Likewise, certain funded ownership arrangements are eligible.
Application is required. The person must be an eligible transferee, it must be an eligible transfer relevantly in s 14, residential land or vacant land the Commissioner is satisfied will be residential land and must be for the whole of the land.
The dutiable value in the case of vacant land must be not more than $800,000 and otherwise not more than $1,500,000.
There is a residency occupation requirement of at least six months and that occupation must start within 12 months after the land is transferred – s 15.
Part 4 deals with opting in.
Application to elect to pay the property tax rather than stamp duty, must be made to the Commissioner.
In the case of an agreement for sale or transfer, the application must be made before the transfer of the land. Otherwise the application must be made the earlier of the duty default period (three months) or when the instrument of transfer is endorsed under the Duties Act – s 16.
Where the application is granted, then the property is liable for property tax under the Tax Act each financial year whilst owned by the person the subject of the application, which is defined in s 18 as “included owner”.
Rate of property tax
The rate of tax depends on the class of use, whether it is for residential or commercial (i.e. rented). In the latter case a higher rate is payable.
The legislation in s 24 contemplates an initial tax rate of a base rate of $400 plus 0.3% of the land value per annum, being the land value as determined by the Valuer General. This is the same concept as is used for Land Tax. In the case where the property is used for investment, then the base rate is $1,500 plus 1.1% of the land value per annum.
The rates are to be unchanged for two years. Thereafter the rates are indexed by the lesser of 4% and in accordance with a formula based on State Product and in the case of the variable component, the relationship between State Product and annual increase in land value – Schedule 2.
There is a choice of payment of one annual payment or four instalments.
Class of land use is determined on a financial year basis. Liability arises at the start of the financial year – s 20(3). Where ownership commences during a year, tax is payable for that part of the year when the property becomes subject to the property tax. Where ownership ceases during the year, tax is payable for that part of the year until the property ceases to be subject to property tax.
Payment of tax
Part 6 deals with assessment and payment. Assessments are made as soon as possible after the start of the financial year. Time for payment of the single instalment is 31 August - s 29. The default is payment by four quarterly instalments – s 30.
Unpaid tax is a tax default under s 31. Reassessment can be made more than five years after the initial assessment.
Part 7 deals with deferral and recovery. There are provisions for deferral on the basis of hardship with particular reference to persons who cannot meet basic living expenses. Interest is payable.
Unpaid amounts of property tax become a first charge on the land. The maximum charge is capped at 75% of the dutiable value of the land – s 38.
Part 8 deals with subsequent transactions. The key provision is s 44(1)(b) where the included owner(s) sell to a person who is not an included owner, duty is chargeable on the transaction and the land ceases to be the subject of property tax.
There are other provisions dealing with transactions between included owners. There are also provisions dealing with death, breakdown of relationship whereby the transfer continues to be subject to the property tax, no duty is chargeable – s 46.
Thus, for most disposals by the first homeowner, the property thereafter is liable to stamp duty unless the acquirer is an eligible first homeowner and elects to pay the property tax.
The Duties Act is amended to include a new section, s 18A, to make it clear that such land is not subject to duty.
The Land Tax Management Act is amended to provide for adjustments of land value as a result.
According to the Treasurer’s second reading speech, the legislation will apply to transfers occurring on or after 16 January 2023. Commencement date is to be by proclamation.
Although in theory an eligible person will have the choice of paying stamp duty or the property tax, most eligible people will choose the property tax, as this will allow them to pay a higher purchase price. They will not need to factor in stamp duty as part of the purchase costs.
Most first home purchasers are not long term owners so, this should in practice produce a cheaper tax outcome for most first home buyers.
Like all tax legislation, there will be unidentified issues and a level of complexity that has to be complied with.
Also, indexation being capped at 4% could be attractive in terms of an assurance of tax to be paid, to the extent that any government can bind a future government.