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Investors looking to reduce their outgoings would do well to understand how land tax works and how they can avoid it.
Blogger: Shukri Barbara, principal adviser, Property Tax Specialists
Land tax is levied by the various states on the unimproved value of land. It’s a great revenue raiser. Where the combined value of all taxable land, owned in each state, exceeds a threshold, land tax is levied. The Office of State Revenue in each state administers its system separately. Rates are progressive, increasing with the increase in land value.
While the main features are common to all states, the tax rates themselves vary markedly and warrant careful consideration when you’re calculating the potential return on investment and deciding which state to buy property in.
Concessional thresholds are generally available for individuals and companies, and some states – including Queensland – allow a threshold for land owned by trusts. New South Wales makes no such concession for land owned by trusts, unless the flexibility is removed from the trusts. In Western Australia, the ACT and Tasmania the same thresholds and rates apply to all entities. Thresholds are generally indexed for inflation.
There are certain land tax exemptions common across all states that relate to principal residences and primary production locations.
Land taxes are an additional expense on wealth and thus reduce net rental yields.
Land tax is assessed on land owned on a particular date: 31 December for NSW and Victoria, and 30 June for land owned in Queensland and WA. So for those adopting short-term strategies of cosmetic renovations and sale or flipping off-the-plan, settling a sale before those dates may mean a saving of tax and consequently a higher profit.
Land tax is generally levied on land. So where the land is jointly owned the concessional threshold is split according to ownership. Generally, it comes as a rebate against the liability.
One strategy to minimise land tax expense is to acquire additional property investments in other states, until the thresholds are reached in each state. This also has the advantage of spreading risk across the various property markets.
Another strategy allowing access to a larger threshold overall, is to place ownership – part or full – in another friend or family member’s name. Control can be maintained by having caveats on the property or taking out a mortgage as you advance the funds for the acquisition.
This has income tax implications, especially if you are using a negative gearing strategy, where you offset your rental losses against your salaried or business income to minimise tax. Other tax implications include capital gains tax liabilities for the person whose name is on the title when the property is sold or has to be transferred back due to conflict, disagreement or death.
In NSW, landowners are required to lodge the ‘initial’ land tax return declaring all his/her land holdings. The authority will keep track after that. This is in contrast to the Australian Taxation Office (ATO), who will chase you up immediately. Note, however, that where any land tax is outstanding, the land will not be transferred on sale. Interest will also be levied in most situations.
The decision to manage the land tax expense must be approached holistically and include a review of the feasibility/ profitability of each new investment. No concessional threshold is available for land owned by trusts in NSW, while only a minimal amount is available in Victoria.
Overall, Queensland and WA have more favourable schemes for aggregated land valued at less than $1 million, while South Australia appears to have higher rates. Remember that rates rise progressively where land ownership increases.
Here's a land tax calculator to work out tax and could aid in diligence and planning.
Disclaimer: The above is to be considered as general education. This is not advice and it is not to be acted upon without advice from a qualified professional who understands your personal circumstances.