With the pandemic disrupting the economy of the country, the state governments have stepped up the process of relief and recovery. In November 2020, the state government of New South Wales proposed property tax reforms to provide a stimulus to the sector. Open for public consultation, the proposal intends to shift NSW to the property tax system from the stamp duty and land tax system. After the consultation is over, the policy will be developed further, and a formal announcement will be made in the first half of 2021.
If you plan to purchase a commercial property for sale in Australia, you must be aware of these tax reforms in NSW to clinch a profitable deal. Here is all the information available about the proposal that is valuable for property buyers.
Proposed Property Tax Changes in NSW
The amendment intends to do away with stamp duty on property transfers. It extends the freedom to choose between paying the stamp duty and the land tax, if applicable, and the new yearly property tax. The rate of the annual tax for a commercial property could be 2.6% of unimproved land value. The rate is only for reference and will get changed after the public consultation.
The system will become an opt-in procedure wherein the buyer can pick either the ongoing property tax or stamp duty and land tax. After the property is opted-in, it will remain liable for property tax for all subsequent buyers of the real estate. The tax burden will be higher on commercial owner-occupiers as the current rate of land tax is lower. Let us give you a detailed clarification on the matter.
Land tax is levied annually on every property that falls above the land tax threshold. It is not applicable to the property used as residence or farm or any other real estate that falls below the tax threshold. The NSW government also announced a COVID-19 land tax relief for landlords who had to reduce the rent because the tenants were financially distressed. At present, it is applicable to landlords who have reduced the rent from 1 January 2021 to 28 March 2021. The eligible landlords are able to get up to a 25% reduction of the 2021 land tax liability. The eligibility includes leasing the property to a commercial or retail tenant, which has an annual turnover below $5 million and has lost 30% or more of its turnover due to the pandemic.
How Reform Will Affect the Property Market?
Initially, only low-priced residential and commercial properties will be eligible for the opt-in system. It means that around 80% of residential and 95% of commercial real estate will be entitled to the tax change. The highly-priced premium properties will not be able to benefit from this system and will have to pay the stamp duty. The threshold has been put in place to make sure that the revenue of the state is not deeply impacted during the transition phase. However, this is only for the initial phase and will later include all properties.
In addition, the NSW government is planning to introduce a retrospective opt-in, which will allow property owners to get a refund for the stamp duty paid on the property they have bought and then pay the new property tax in future.
Benefits for Commercial Property Buyers
For investors who are trying to get a piece of commercial real estate in Sydney and its surrounding suburbs or other regions of NSW, the change will mean that they can now pay an annual property tax. The new tax combines stamp duty and land tax, which will make the commercial real estate owners pay more tax in comparison to owner-occupiers. For entrepreneurs, the changes in the tax system can help in creating opportunities for business growth as they can move and scale up at a faster pace.
A significant advantage for business owners is the rise in income tax deductions under the annual property tax. It can help them in saving a lot of capital while expanding the business. The changes are expected to contribute $11 billion to the economy in four years that will offer a respite from the current downturn brought about by the COVID-19 pandemic and the subsequent lockdown.
The proposed tax change will be highly beneficial for property owners who do not plan to own real estate for the long-term. They can enjoy the ownership while paying only the land tax for a limited period and save a huge amount, which they would have to pay as stamp duty.
On the other hand, if the buyer plans to own the property for a long time, he/she can choose to pay the stamp duty upfront rather than paying smaller amounts every year.Most commercial property owner-occupiers stay in one location for a long duration as the goodwill of the business is built in one place over time. They also have their clients and suppliers located in proximity, so changing the office or shop every few years is not beneficial for them.
A Few Areas of Concern
The proposed reforms do not provide any information about the rating applied to mixed-use commercial properties. Also, owner-occupier and investment real estate have different rates, so it is not clear how the tax will be calculated for those working from their home office. Experts are sceptical that some buyers may not be willing to sell their properties if they have paid the stamp duty as they will feel that they have already paid the taxes. In addition, it is being suggested that down the line the properties that will have the option of paying stamp duty on the purchase will draw a premium from the buyers who want to hold them for an extended period.
It is the amount of tax that is paid at the time of purchase of a residential or commercial property. Also known as land transfer duty, it depends on various factors such as the location, selling price and the real estate portfolio of the buyer. The tax was introduced in the state way back in 1865 and was only 0.5% of the property value in the beginning. Over the years, the stamp duty levied on the purchase of property has increased considerably and soared to 4%, which makes small investors sceptical of making a purchase.
The proposed property tax changes have not been finalised but have created a stir in the market. If you are planning to purchase commercial real estate in Australia, you must keep track of the tax changes to make an informed decision.
Manish is founder of Business2sell Group of Websites.
Business2Sell.com.au is one of the leading business and franchise for sale listing websites. We work with our business brokers, commercial agents, franchisors and private sellers to help them connect with the right buyers for their opportunities.
With website now functional in Australia, United States, United Kingdom, Canada, New Zealand and South Africa. We have over 18,000 businesses for sale listed, with over 220 Business Broker and Commercial Agent.
I have over 20 years of experience in Web Industry; I have been involved in websites industry since the early years of 1996-97. In my professional career I may have worked for over 10,000+ websites. My Specialty is to build portals or complex online applications.
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