Sydney Managing Partner and Partner, Audit
The NSW State Budget 2022-23 (Budget) was handed-down on Tuesday, 21 June 2022. The Budget continues the NSW Government’s reform agenda, while confirming that NSW is emerging from the COVID-19 pandemic in a strong financial position. With the return to surplus now expected to be in 2024-25, the NSW Government has financial room to fund a big spending budget. This is ahead of the next NSW State election due on 25 March 2023. This additional spending is wide-ranging and includes:
- Education - one year of free pre-kindergarten and extra funding for pre-schools
- Energy - focus on renewable energy and increased rebates for rooftop solar energy systems
- Health - increased funding for healthcare workers
- Housing - shared equity scheme and stamp duty reform aimed at first home buyers
- Infrastructure - improved transport and community infrastructure for Western Sydney.
The Budget shows that these increases in spending will be funded by an expected short-term increase in revenue from various sources. These sources include:
- Increases in royalties from coal, largely as a result of Russia’s invasion of Ukraine
- Increase in NSW’s share of Goods and Services Tax (GST)
- Continued property market strength, resulting in higher-than-expected stamp duty and land tax revenues
- Stronger economy leading to increased GST and payroll tax collections.
However, there are several uncertainties that could have a significant impact on the ultimate budget position over the next few years. These uncertainties include:
- Ageing population reducing labour force participation
- Easing of house price growth
- Longer-term declining royalty revenues, with falling demand for coal as countries transition to net-zero carbon emission sources.
The Budget also indicates that the budget position can be supported by reforms that grow the economy, including support for women’s economic opportunities. This support will help to ensure that women’s workforce participation is equal to that of men, as well as the fast and orderly transition to renewable energy.
Stamp Duty and Land Tax reform
The proposal to replace stamp duty with a land tax for first home buyers has long been recommended as part of a holistic reform of the Australian tax system. While it is good to see that the NSW Government is making a start on the tax reform process, it would be preferable if this could have been done as part of a more comprehensive and sustained tax reform process involving The Commonwealth and State Governments.
As the proposed change allows first home buyers to opt-in to this new system, it is difficult to forecast what effect it will have on the housing market. This is because it will be up to individual choice, and the reaction of the banks when financing purchases of properties under the land tax option. While the loan amount required will be reduced under the new land tax system, the borrower and the bank will need to factor in the ongoing land tax payments that will need to be made each year. This will reduce the available income required to pay the loan repayments, which may lead to the bank reducing the amount they are prepared to lend. It is hard to say whether this reform will actually make it easier for first home buyers to finance their home purchase.
The NSW Treasurer has indicated that an important object of this reform is to make it easier for first home buyers. However, it does not deal with the underlying causes of increasing house prices. The main reasons for increased house prices are:
- Lack of supply of new housing
- Shortage of trained builders and other tradespeople
- Increased cost of building materials caused by Australian bushfires and floods, as well as COVID-19 global trade restrictions
- Tax incentives for investors that allow them to outbid owner-occupiers.
These are important issues that will also need to be dealt with by the State and Commonwealth Governments if the housing crisis is to be solved.
Partner, Project & Infrastructure Advisory
The NSW Government has announced record levels of investment in infrastructure and healthcare, cost-of-living relief, regional assistance, and investment in technology. The forecast deficit has more than tripled since the 2021-22 half yearly review.
These announcements are future-focussed with a key theme of reform, along with support for new home ownership and women’s workforce participation being key focus areas. The current deficit has largely been driven by costs incurred during the COVID-19 pandemic, as well as health spending and the impact of recent floods.
The NSW Government is seeking reform for home ownership and increased women’s workforce participation in this budget, which have been pain-points in the NSW economy to date. This Budget acknowledges that families are requiring support with cost-of-living pressures and rising inflation, with the announcement of assistance for education and childcare costs.
The infrastructure sector will also benefit, with expansion of the Regional Growth Fund, as well as funding for road and rail projects.
The reform to increase home ownership may put upward pressure on house prices, given the increase in demand. This could cause some issues, given the already high house prices and rising interest rates, meaning that some household budgets could come under stress as mortgages become harder to service.
Partner, Project & Infrastructure Advisory
The NSW Government’s infrastructure pipeline is continuing to grow, with a record $112.7 billion commitment to deliver new and upgraded infrastructure over the next four years. The Budget includes: $76.7 billion for transport infrastructure, $11.9 billion for hospitals and health facilities, and $9.2 billion for schools and educational facilities.
These infrastructure investments are intended to ensure that NSW remains the best place to live, work, and raise a family. The delivery of integrated transport networks will better connect people, communities, and businesses. The construction of new and upgraded health facilities will help support growing demand for health services. In addition, modern, high-quality learning environments will transform teaching and learning.
This Budget continues to focus on delivering transformational infrastructure projects across Western Sydney. This includes:
- $261.9 million for a new Advanced Manufacturing Research Facility in the Bradfield City Centre
- $602.4 million for Parramatta Light Rail Stage 2
- Over $20 billion for Sydney Metro projects.
Investment in regional infrastructure will support the recovery and wellbeing of regional communities following drought, bushfires, floods, and the COVID-19 pandemic. The key investments include:
- $3.2 billion for the Great Western Highway Upgrade
- $885.1 million for the Newell Highway Upgrade
- Over $900 million for Special Activation Precincts.
The Budget supports the already announced 20-year research and development roadmap from the NSW Government, with more than half-a-billion dollars dedicated to research facilities and manufacturing plants.
The NSW Government has announced that $119.1 million will be invested in Ribonucleic Acid (RNA) technologies over a decade for therapeutics manufacturing, along with nearly $50 million for the Viral Vector Manufacturing Facility. Of particular significance, a shared use Advanced Manufacturing Research Facility (AMRF) has been funded with a $261.9 million investment.
We anticipate that the latter investment in the AMRF will significantly bolster Australia’s high-tech manufacturing capability, as well as reshaping the landscape of Western Sydney’s employment and urban environment. The AMRF will create new high-paying jobs in the Western Sydney district and encourage businesses, engineers, and researchers to continue their technological advancement and innovation.
The NSW Government has announced their plan to overhaul the stamp duty system in a program called the ‘First Home Buyer Choice’ investment. This will allow purchasers to opt-in to an annual property tax payment, instead of stamp duty, on properties valued up to $1.5 million. The annual tax is proposed to be $400, plus 0.3 per cent of the land value of the property.
This is the first step in assisting first home buyers to enter the property market and achieve reform in NSW, since stamp duty was introduced to NSW in 1865. We are of the opinion that a modernisation of the state tax regime in NSW is particularly required to achieve this reform.
The proposed increase in the land tax surcharge for foreign investors, from two per cent to four per cent, could potentially backfire. This is because it may drive away foreign investment amid precarious economic conditions.
The NSW Government is expecting payroll tax to overtake transfer duty as the largest source of taxation revenue from 2022-23. This is due to the expected slowing of the residential property market, despite the new First Home Buyer Choice program. Businesses will now see payroll tax rates return to 5.45 per cent, up from 4.85 per cent over the last to financial years. However, they should be prepared to juggle these increased payroll tax payments, alongside rising interest rates and inflationary pressures.
You can read more of our commentary on the NSW State Budget 2022-23 in our media release, along with subscribing to receive further updates directly to your inbox