Proposed Optional Housing Tax - Effects

Apart from the sharing of GST revenue and receiving various other grants from the Federal Government, the NSW Government also raises its own taxes, some of which have a direct bearing on federal Government revenue. Land Tax, Payroll Tax and Stamp Duty make up the major part of state tax revenue at present.

For federal Income Tax purposes the state Land Tax is tax deductible whereas Stamp Duty is not deductible but is taken into account when the investment property is sold and forms part of the capital base when determining liability for Capital Gains Tax which itself is subject to a 50% discount.

For the past eighteen months the NSW state Government has been investigating the possibility of introducing a perpetual annual housing tax in place of the current one-off payment of Stamp Duty, which is not tax deductible for federal Income Tax purposes, but is taken into account in determining the cost base of the property when determining liability for Capital Gains Tax when the property is sold (unless the property is the principal place of residence which continues to be Tax exempt for federal Capital Gains Tax purposes). Where an investor purchases an investment property the accompanying federal Income Tax and Capital Gains Tax taken by the federal Government will be adversely affected for investment property if NSW decides to proceed with the introduction of an annual Housing Tax.

I

f the Housing Tax becomes an option in NSW (which is akin to the current annual Land Tax) then whether a purchaser adopts the Housing Tax option or decides to pay Stamp Duty will be dependent upon the expected duration of ownership of the property. It will simply involve a mathematical calculation on the part of the purchaser based upon the duration of expected ownership.

Under the current federal Income Tax law the yearly payments of the Housing Tax will become tax deductible to a property investor in the year in which it is paid, just like the current state Land Tax. Unlike Stamp Duty, it will not affect the cost base for Capital Gains Tax purposes.


If the choice is made to pay Stamp Duty then this will not be tax deductible when paid but will be added to the cost base purchase price for Capital Gains Tax purposes when the property is sold.


If a Housing Tax is introduced as an option in NSW, it will no doubt have a considerable effect on the annual Federal Income Tax taken, which may result in a change in the Federal Tax law such as disallowing a deduction for the Housing Tax and requiring it to be added to the property cost base so it comes within the Capital Gains Tax provisions.


This could occur if the Federal Government becomes concerned about the erosion of its revenue base.