A Quick Story
I want to tell you a quick story of a new client situation we often get (about once a month) that might be relevant to you.
Let’s call him Rod – I had a meeting with Rod regarding a serious tax issue last week. Over the last 5 years, he has been working hard to build a property investment portfolio. He’s done a great job of growing it to 7 properties under his belt and a majority of these properties are positively geared.
He was paying income tax on the rental profit every year. Now, you may think that isn’t a serious tax issue. Well, it isn’t. It’s great because that means he’s making money on his properties. Also, there are ways to reduce income tax such as claiming property tax depreciation, something our good friends at Duotax can help with. However, it’s not the income tax that’s the serious tax issue.
It’s land tax.
Land tax or as we like to call it – “Forgotten Tax”. Believe it or not, this is the tax that most property owners do not know they need to pay before it’s too late. For example, in NSW, the land tax rate enforced is 1.6% of the assessed land value of the property that is over the threshold. So, assume you own land in NSW valued at $1,000,000. You could be up for land tax of $16,000 every year!
Unfortunately for Rod, as he owns 7 properties, his land tax bill was over $50,000! I know, that’s someone’s annual wage!
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What is Land Tax?
Land tax is a tax paid to your state or territory government (except Northern Territory) each year you own property above a certain threshold. This threshold varies from state to state and can include land that is vacant and yet to be developed on. The only property generally exempt from land tax is your ‘principal place of residence’. This is generally levied at the end of the financial year or calendar year, dependent on the state your property is in.
Why is it Called the Forgotten Tax?
Land tax is notoriously known as the forgotten tax due to owners of property receiving very little notice before being hit with a land tax bill. Property owners generally find that very little warning is received in advance and if you are simply unaware that land tax exists, it can be a nasty surprise in the mail at the end of the year.
How is Land Tax Calculated?
Again, depending on your state, land tax is paid is calculated based on the combined ‘unimproved value’ of all property subject to land tax. Unimproved value refers to the market value of the property under normal sales conditions provided that no structural improvements have been made. Once the value (or combined value) of your land exceeds the exemption threshold, you are charged a base amount plus a percentage amount for each dollar your land value exceeds the threshold. These valuations are generally determined by your state or local council.
For example, in NSW the general threshold for land in 2019 is $692,000. Each year, property owners are charged a base rate of $100 per property plus 1.6% of land value above the threshold. Land tax is applied in NSW for the full year following the taxing date of 31 December. If someone owns land worth $740,000, then the below calculation applies:
($740,000 – $692,000) x 1.6% + $100 = $868
As you can imagine, owning multiple and high-value properties can result in some significant land tax paid each year.
When Does Land Tax Not Apply?
This depends from state to state but is generally more targeted towards investors rather than owner-occupiers. For example, in NSW, land tax does not apply to:
- Your principal place of residence
- Your primary production land such as a farm
- Any land that is below the land tax threshold
In all other cases, generally, land tax will apply. However, some concessions or exemptions can be applied in situations such as moving between homes or if you have mixed-use properties. Consult your State Revenue Department for more information on this.
How Can I Reduce Land Tax Paid?
Several strategies can be deployed to reduce land tax. However, we highly recommend consulting a qualified accountant to give you proper guidance. Ill-informed or misguided steps taken may result in severe penalties if the State Government is made aware of this. Some of the strategies may include:
- Purchasing the property in the name of the person who may not have used the respective threshold in a state the property is in
- Purchase land with a separate entity that has not used the respective threshold in a state the property is in
- Invest in property in multiple states
- Consider revising your budget when purchasing property to stay under the threshold
Being aware of land tax is the first step to ensuring that you are making the best investment decision before purchasing your next investment property. Consider all the factors concerning the state the property you are looking to purchase in, the thresholds, what your current investment portfolio is and under what ownership entities these properties are under. With the assistance of an accountant, you can make the best decision to maximise your investment returns whilst minimising the amount of tax paid. At Box Advisory Services, we can help clients like Rod and yourself if you’re looking to purchase your next property or simply looking to potentially restructure your investment portfolio. Get in touch with us today to book in a free 45-minute free consultation.
To find out more information on buying property in each state, visit business.gov.au
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Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.