Property tax in New South Wales is set to receive a shake-up amid plans to enable home buyers to avoid paying stamp duty and instead pay a broad-based land tax, media reports suggest.

The Sydney Morning Herald has reported that NSW Premier Dominic Perrottet will overhaul stamp duty in the upcoming budget.

Whilst details are yet to be confirmed, it is understood that the changes will enable home buyers to avoid paying up-front stamp duty and instead opt in to paying an annual land tax.

To limit any impact to the short-term finances of the state, the top twenty percent of residential properties by price would not be eligible.

Past property purchasers would not be affected.

The decision to move to a land tax would be permanently locked to the property, so future owners would have to pay the land tax if a previous one had.

This would eventually lead to stamp duty being phased out altogether.

The latest development comes as economist and property industry lobby groups have long called for the abolition of stamp duty across Australia.

Stamp duty is a once-off transactional tax that is charged on the purchase of a property.

The exact amount varies according to different states and territories and the price of the property being purchased.

As is the case in some other states, first-home buyers are exempt from paying stamp duty in NSW (subject to requirements).

In February, Housing Industry Association estimated the average stamp duty bill on a median priced home in New South Wales at $34,847. This is lower compared with the average stamp duty bill in Victoria ($40,730) but was well above the average paid for a median priced home in Queensland ($11,005).

For many years, economists have called for stamp duty to be replaced with either a broad- based land tax or other funding sources.

For households, the need to fork tens of thousands in stamp duty each time they buy a new home can serve as a barrier to seeking new dwellings as their housing preferences and needs change.

This includes older Australians seeking to downsize to smaller homes, younger people seeking larger homes as household/family size increases and workers wishing to change locations to capitalise on new business or employment opportunities.

For state governments, reliance upon stamp duty as a source of income can see finances become hostage to the property cycle.

Tom Forrest, CEO of developer lobby group Urban Taskforce, welcomed the reported moves.

Forrest says stamp duty causes many problems.

“A shift away from Stamp Duty, which is a tax on property transactions, to a broadly based property tax is a shift that has been supported by economists from across the spectrum for decades…” Forrest said.

“Stamp Duty actively works against transactions.  This forces people to stay in the home they live in, even if they have outgrown that home.  This means that larger homes that might suit a growing family are not on the market, forcing the prices up for those homes which are available.

“Stamp Duty is also levied on the purchaser of a new home.  It hits those that can least afford to pay due to the massive increase in homes across Australia, but particularly in NSW cities and regions. Stamp Duty is a tax on making homes available for sale and it hits those who have already been hit by the Government’s failure to address housing supply and the resultant housing affordability crisis…

“…The problem with Stamp Duty has always been that State Governments are addicted to the revenue.  The financial difficulty for the NSW Premier and his Stamp Duty reform aspirations was always an initial drop off in revenue for a number of years while the transition was being worked through.  Now that the new Federal Treasurer, Jim Chalmers, has said he is prepared to come to the table and work with the States on this, there are genuine prospects for progress.  This is a sea-change in attitude from the Commonwealth.

“Shifting to a property tax also avoids wide fluctuations in revenue for State governments as property markets shift through the cycles of the market.  It also effectively builds value capture into the tax system – if the property value (and amenity of the home) goes up due to new infrastructure, so will the land tax bill. This is genuine tax reform.”