NSW 2020-21 Budget announcements and proposed tax reform

24 November 2020

In brief

On 17 November 2020, the New South Wales (NSW) Treasurer, the Honourable Dominic Perrottet MP handed down the 2020-21 NSW Budget.

The Budget and associated announcements focused on tax reform and economic stimulus. Notably, the Budget included the launch of public consultation on a significant property tax reform proposal that would give property buyers the choice to pay either stamp duty and land tax (where applicable), or a new annual property tax. Further cuts to payroll tax and a further extension of land tax relief due to COVID-19 were also announced.

This alert sets out the key highlights so that you can consider how these rules might apply to you.

In detail

Tax reform for properties

The NSW Treasurer announced as part of the Budget a proposal that would change the manner in which the State would tax property. This reform would be the first step in a move to abolish stamp duty on property transfers.

Specifically, the proposed reform, if successful, would give NSW property buyers the choice to pay either stamp duty and land tax (where applicable), or a new annual property tax (that would ultimately replace both stamp duty and land tax). The annual property tax could be levied at the following rates (noting these are indicative only rates, and will be refined as feedback is received from the public):

• owner-occupied residential property - $500 + 0.3 per cent of the unimproved land value
• investment, residential property - $1,500 + 1 per cent of the unimproved land value
• primary production land (farmland) - 0.3 per cent of the unimproved land value
• commercial property - 2.6 per cent of the unimproved land value.

No indicative timeframes for the proposal to commence have been provided, as there is a Public Consultation process to hear the public’s views about this proposed reform (submissions due on 15 March 2021), before it progresses further. There are a number of issues that need to be considered carefully in assessing the proposal, how it would practically be implemented and the transition to any change. For more information about the proposed changes, please visit the Treasury website.

Stamp duty measures

The Budget introduced a number of concessions in relation to duties on home purchases:

• increase in first home buyer concessions by reducing transfer duty for one year for new homes valued between $650,000 and $1 million. A first home buyer will pay no transfer duty when purchasing a new home valued up to $800,000 (a saving of up to $31,335), and a concessional rate where the home is valued between $800,000 and $1 million. Similar exemptions apply for first home buyers of vacant land valued up to $400,000, with a concessional rate applied where the value is between $400,000 and $500,000, and
• people who lost homes in the 2019-20 bushfires can access up to $55,000 in transfer duty relief if they purchase a property elsewhere in NSW rather than rebuild on the same property. 

Payroll tax

Throughout the current calendar year, the NSW Government has delivered numerous concessions for businesses in relation to payroll taxes due to the economic impact of COVID-19. The Budget confirmed and extended many of these arrangements:

• the payroll tax rate will temporarily be reduced from 5.45 per cent to 4.85 per cent for all NSW tax-paying businesses in the 2020-21 and 2021-22 financial years. These changes are estimated to provide NSW businesses with around $2.1 billion in savings across this period
• the payroll tax threshold will also permanently be increased from $900,000 to $1.2 million from 1 July 2020. This is expected to save businesses an additional $166 million in the 2020-21 financial year, and a total $744 million over the four years to 2023-24
• businesses with grouped Australian wages of $10 million or less for the 2019-20 financial year had 25 per cent of their 2019-20 annual payroll tax waived by the NSW Government. This measure is expected to lower payroll tax revenue by $450 million in 2019-20, and
• for those employers in receipt of JobKeeper payments, the NSW Government has exempted from payroll tax any additional wages paid to eligible employees as a result of the requirement to pay them an amount at least equal to the applicable JobKeeper amount. This exemption is expected to reduce payroll tax revenue by a total of $270 million, namely $130 million for 2019-20 and $140 million for the 2020-21 financial years.

Land tax

In relation to land taxes, the Budget also extended the relief that had been provided to many landlords where tenants were experiencing financial distress as a result of COVID-19.

The existing land tax relief for the 2020 land tax year of up to 50 per cent where tenants experiencing financial distress were provided with rent reductions as a result of COVID-19 was extended, allowing for a reduction of up to 25 per cent for rental reductions provided for each of the periods from 1 April 2020 to 30 September 2020, 1 October 2020 to 31 December 2020, and 1 January 2021 to 28 March 2021. Eligibility requirements include:

• the landlord reducing rents of commercial tenants who have faced at least a 30 per cent reduction in turnover, or residential tenants who have faced at least a 25 per cent reduction in household income
• in 2020, commercial tenants must have an annual turnover of not more than $50 million to be eligible, and
• in 2021, the relief will be limited to rental reductions provided to retail tenants with annual turnover of up to $5 million.

As announced previously, land tax concessions of up to 50 per cent on applicable land until 2040 for new build-to-rent development that commenced construction on or after 1 July 2020. Criteria include, among other things, that the property is managed under unified ownership, and must not be subdivided within the first 15 years. Eligible build-to-rent properties are also exempt from foreign investor surcharges. More information in respect of this measure can be found here.

Other Budgetary measures

• The NSW Government will inject up to $500 million in the ‘Out and About’ program to stimulate spending in the local economy, including restaurants, visitor sites and cultural attractions. Every adult NSW resident will be eligible to claim up to $100 in digital vouchers to spend on eating out and entertainment.
• $472 million will be provided to small and medium-sized businesses which do not pay payroll tax in the form of access to a $1,500 digital voucher, to be used towards the cost of any government fees and charges before 30 June 2022, and available from April 2021.
• The freezing of indexation rates in respect of motor vehicle weight tax for heavy vehicles (which forms part of the registration fees) will lower motor vehicle weight tax revenue by $34.4 million over the four years to 2023-24.
• A one year extension to the rebate for Primary Producers Heavy Vehicle Registration costs will lower motor vehicle weight tax revenue by $36.1 million in 2020-21.
  

NSW economy

The NSW Treasurer announced an expected $16 billion budget deficit in 2021. Net debt will increase from $19.3 billion as at June 2020 to an estimated $104.3 billion in June 2024.

Over the second half of 2019-20, economic activity in NSW contracted by almost 10 per cent. The unemployment rate rose to its highest level since the late 1990s and is not expected to trend back to 5.25 per cent until the June quarter of 2024. Household consumption also fell by 15 per cent and business investment fell sharply.

The NSW Government has delivered support for the following over the last 12 months, including: 

• $4.5 billion for drought and water security;
• $4.4 billion in bushfire relief and recovery initiatives in partnership with the Commonwealth, and
• $16 billion in support in response to the COVID-19 pandemic.

Trends in taxation revenue

Tax relief in combination with the economic impacts of the COVID-19 pandemic has resulted in general government revenue being $2.8 billion lower in the 2019-20 financial year than was forecast at the 2019-20 Half-Yearly Review.

General government revenue is expected to be $14.8 billion lower in net terms over the four years to 2023-24 in comparison to the 2019-20 half-yearly forecast, with the near-term revenue outlook shaped by the ongoing economic impacts of the COVID-19 pandemic and temporary support through the tax system. In particular:

• lower national consumption is expected to result in a loss of goods and services tax (GST) revenue (including ‘no worse off’ payments) to NSW of $8.7 billion over the four years to 2023-24
• business support measures, weak employment and wages growth will drive a $6.8 billion reduction in forecast payroll tax revenue over the four years to 2023-24
• transfer duty revenue has been revised down by $2.3 billion over the four years to 2023-24 on weaker than previously forecast transaction volumes, in the near term
• revenue from sales of goods and services has been revised down by $1.1 billion over the four years to 2023-24, largely as a consequence of weaker transport service revenues, and
• sustained weakness in the global coal market has reduced expected mining royalties revenue by $1.4 billion over the four years to 2023-24.