Stamp Duty — A Make Or Break Expense

So just what is stamp duty and why is it the first thing people warn you about when you tell them you’re ready to buy your first property?

In Australia, you must pay stamp duty when buying any type of home or property. It’s a one-time upfront government transfer duty or tax that is required when a property, building, or a parcel of land changes hands to a new owner. Stamp duty is charged in both residential and commercial real estate sales and the rate is dependent on the following factors:

• The state you’re buying in: All states have different methods of calculating stamp duty so the amount will differ.
• The price of the property: In general, the cheaper the property is, the less stamp duty you will pay.
• The type of property you’re buying: Vacant land will have less stamp duty compared to buying an established home.

Originally this transaction did actually include the use of an physical revenue stamp, for the curious among you wondering where the name came from. Imagine, if you will, one giant block stamp, handcrafted by elders in an ancient technique, now lost in the folds of time and wielded by only those true of heart. Surely only that could justify why stamping a piece of paper after a quick once-over could possibly cost what it does, right? Wrong.

It did use to be a real stamp (like a postage stamp) that was attached to, or impressed upon, a document to show that stamp duty had been paid, thereby proving the document was legally valid. Now, in this relatively new millennium, more modern versions of the tax no longer require an actual stamp.

‘Boo!’ say all the philatelists.

For anyone new to this stamp duty business, please heed the following:

Stamp duty must be considered when calculating your homebuying budget as it can be as much as 4-5% of the value of the property. This is clearly a considerable sum, nay, a gigantic amount, often reaching into the tens of thousands and all before you can even calculate what you need for a deposit! Because, remember, deposits do not include stamp duty — this is a separate charge and needs to be considered before making an offer on a property or bidding at an auction, as both of these contracts are legally binding.

So stamp duty is an unavoidable tax for anyone buying a property in Australia, but who is it really benefitting?

Who Is Stamp Duty Benefitting?

Stamp duty brings each state government lots of revenue and like any tax, the revenue raised is invested in the community to build affordable housing, maintain roads, and prop up overstretched public schools and hospitals, to name but a few examples. However, back in 2010 when the Henry Tax Review was published, it found stamp duty was inequitable or, for the layperson, just downright unfair (you can now cross your arms and stamp your foot).

You might now be thinking ‘hang on, so it’s for the community but also negatively impacts individuals within the community?’ Truly opinion on the need for stamp duty and the potential alternatives to the upfront payment of stamp duty (such as increasing the more stable land tax) are divisive, and sometimes contradictory depending on whose opinion you are hearing.

In the case of the Henry Tax Review, it basically stated that stamp duty negatively affects the people who can least afford it and actually impedes the freedom of those people trying to get into the market or those who need or want to move.

While the policy would certainly incentivise many first homebuyers in Australia, the downside is that greater housing demand could lead to higher home values and property prices, which ultimately would only benefit the seller.

In a nutshell — stamp duty stalls the market and cripples availability.

More recently, stamp duty has had an impact on small time investors who overshot their portfolio ambitions during the heady days of record low interest rates (stares into the distance longingly). Here’s an example:

Just say you purchased an investment property, sensibly working out that the rent you’d receive would basically cover the mortgage (note you may have done this because you weren’t able to afford a place to live yourself). Then interest rates climb by 4.5% and now you’re having to service the considerable shortfall of this mortgage out of your own, already-stretched living expenses.

Many investors in this type of scenario want to sell these investment properties, so then the market is flooded, prices level out (or in some cases decrease), and if you’re lucky enough to find a buyer, you may just get what you paid back and then you realise — gulp — that on top of making ZERO, you also paid out $16,000 in stamp duty.

It’s true you’ve avoided capital gains by doing this, but this type of equation is what makes investors suck it up and hold property that could be released back into the market during a time of housing shortages. And guess what? The only way to compensate for these situations is for property owners to hike up their tenants’ rents, thereby making it difficult for renters to save for a deposit for their own place. And round and round it goes.

The fact of the matter is that governments need taxes to run the individual states and territories and, at the end of the day, they have to get the money from somewhere. So given that, let’s take a look at how stamp duty logistics play out across Australia.

Stamp Duty State By State

Let’s note first that what you pay in stamp duty is directly correlated to the cost of the property you’re buying, the location of the property (whether it’s rural or metro), but more importantly, the state or territory you’re buying in. It’s a sliding scale, as it’s controlled by each state government, not the federal government.

You can easily calculate it by using this simple online tool. Below is just a snapshot of calculations showing stamp duty charges from state to state (using the above stamp duty calculator) and set to the same parameters, with the only variable being the state or territory:

So, when we’re looking at this hypothetical property, valued at $750,000 and to be purchased by an owner-occupier, you can see the dramatic variations. In some states this duty stays consistent regardless of the nature of the purchase, be it owner-occupier or investment. And some states also reduce the cost or waive stamp duty altogether for first-time homebuyers.

Knowing what you do about stamp duty now, it’s always best to check it with the stamp duty calculator on a case-by-case basis. But thanks to concessions offered by different states, you may be able to subvert some of this cost.

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Are There Exemptions From Stamp Duty?

Ah, good news, finally.

Luckily, most states offer stamp duty exemptions and concessions, especially for eligible first-time homebuyers. So, when calculating how much you’ll need to set aside for your first home — your deposit, stamp duty, solicitor or conveyancer costs, building/pest inspection fees, therapy (eeek!) — it’s important to know which exemptions and concessions are available to you.

As an example: eligible first home buyers purchasing a property worth less than $650,000 pay no stamp duty under the NSW government’s First Home Buyer Assistance Scheme.

All states offer avenues for a concession or exemption on stamp duty in one form or another. Remember! Concessions and exemptions listed below vary from state to state so don’t automatically presume they’ll apply to your situation. Do your research!

• First-time homebuyers: Those who have never owned before and will occupy the property may be eligible for a First Home Owner Grant and/or stamp duty exemption.
• Disability/Pension: If you qualify for one of these then you may be entitled to access a once-only exemption or concession to help you access the property market.
• Purchasing off the plan: This concession means eligible home buyers only pay stamp duty on the dutiable value of the home, which is the contract price minus the construction or refurbishment costs incurred on or after the contract date.
• Home concessions: These can save buyers purchasing a home (not just first-home buyers) up to $7,175 off the transfer duty payable. This concession applies to the first $350,000 of the value, and the general transfer duty rates apply thereafter.
• First home vacant land possessions: The concession can save eligible buyers up to $7,175 for purchases under $400,000. For vacant land under $250,000, no transfer duty is payable.
• Transfers for personal relationships or between spouses: These types of transfers are exempt from duty if the property is the principal place of residence for the parties at the time of transfer. Other eligibility requirements include that the property must be held as joint tenants or tenants in common, and the parties to the transfer are a couple or caring partners with no other party involved in the transfer.
• Principle place of residence: This may be available for home buyers who intend to live in a home for a continuous period of 12 months (beginning within 12 months of purchase) if the property is valued up to $550,000.
• Farms: Those used solely for primary production may be transferred to a family member without stamp duty (assuming eligibility). However, there can be no exemption for any subsequent transaction of the same land within five years.

The best way to discover the bounty of exemptions and discounts is to search ‘stamp duty’ on your state government’s website. Then you can find a bunch of accurate and up-to-date information relevant to your situation.

Stamp Duty: Better The Devil You Know?

While removing stamp duty for first-time homebuyers and offering an alternative option to pay an annual land tax could cut out several years’ worth of saving for a deposit (which would mean more first homebuyers could get into their own homes far sooner), it would just be putting off the inevitable.

We can’t really do much about stamp duty other than rely on future state and federal governments to consider policies that would streamline the housing market and make it more efficient and affordable for everyone. What we can do now though is educate ourselves better so that, come election time, we understand the policies regarding these types of taxes and we’re better equipped to make informed decisions as we flex our democratic muscles in the polling booths.

With awesome lenders like Sucasa, the amount you need for a deposit will be far less, but unless you qualify for any of the concessions or exemptions, stamp duty will remain unchanged.