Understanding your tax obligations when investing is a tricky business. Never is this more the case than when considering land tax. This tax was introduced over a hundred years ago, in order for state governments to derive an income from landholders, based on the value of their land. It is a complicated tax to understand, and yet it is extremely important to take into account when investing in property. Here, we attempt to demystify the issue of land tax, and simplify it for those hoping to make the most out of their investment portfolio.
What is land tax?
Land tax rates, thresholds and calculation dates differ between states. In NSW, land tax is calculated on the land you own as of midnight, the 31st of December each year. In QLD on the other hand, as well as in some other states, the value is calculated as of the 30th of June. Land tax is applicable, regardless of whether an income is derived from the land, and is payable in addition to stamp duty. While some states have a flat rate for land tax, others use a sliding scale to calculate the tax payable. Land tax is calculated based on the combined value of any land you own (or have an interest in) which is not your principle place of residence (including holiday homes and units). The value does not include any improvements to the land, or structures such as housing.
Exemptions to land tax
Trusts, companies and individuals are all obligated to pay land tax, however the principal place of residence for individuals is excluded from this. You are only able to claim the exclusion on one property, however exceptions are made for those operating a business on their land. In this instance, the percentage of the land used for residence may be deducted from the land tax payable.
For individuals who purchase a property with the intent to use it as a principal place of residence, a concession may be applicable. Land tax is not payable, for 4 years, when:
- Land is purchased for the purpose of building a principal place of residence, where the owner has already claimed another place of residence for their exception to land tax, or
- A principal place of residence is being renovated, while another property is serving as the principal place of residence.
Other exceptions include land which is used for primary production (and is zoned as rural or non-urban), land used for low-cost accommodation, retirement villages, aged care and nursing homes, as well as the land owned by religious and charitable organisations. Read more about exemptions and concessions to land tax here.
What is the land tax threshold?
In NSW, the land tax threshold for 2017 is $549,000. The rate of land tax is $100, plus 1.6% of your land’s value. from the point of the threshold, to the ‘premium rate threshold’ of $3, 357, 000. After this value, the rate increases to 2%. The value of land is determined by the Valuer General, and is finalised on the 1st of July each year. The valuation of strata units is calculated on a proportional basis for each strata lot. You can find more information about valuation in NSW from the Valuer General.
Does ownership affect land tax?
While it may be tempting to purchase land in the name of your household’s highest income earner or as a trust in order to maximise the tax concession possibilities, this can be a costly move in the long run. As land tax is calculated based on the land value of your entire portfolio (with the exception of exclusions like the family home), it may be beneficial to divide land ownership between each individual involved. As each person is subject to a tax-free threshold (of $549,000 in NSW), you may avoid paying land tax, or lesser your tax payable, by dividing property strategically between individuals.
It is also worthwhile considering purchasing investment properties across different states, in order to take advantage of the tax-free threshold that each state affords investors. You may significantly reduce the amount of land tax you are liable for, by carefully considering your ownership options and the states over which you spread your portfolio.
Penalties for absentee and foreign owners
Some states have recently implemented surcharges on foreign and absentee property owners. This has been done in a bid to reduce the amount of foreign ownership, and boost housing and land availability for first home buyers and Australian buyers at large. Within NSW, a 0.75 per cent surcharge applies for foreign owners of land, and this is payable in addition to land tax (and regardless of whether land tax was payable on the property). This surcharge also applies to the principal place of residence for these particular owners.
Within Queensland, a 1.5% land tax surcharge has been established, which is payable by foreign and absentee owners (‘absentee’ refers to anyone who does not ordinarily live in Australia, even if they are an Australian citizen.) As is the case in NSW, absentees are not eligible for an exemption for the primary place of residence, or for primary production. Unlike a vacancy tax, the land tax surcharge applies whether or not the residence is occupied.
Penalties for absentee and foreign owners
If you are considering purchasing your first investment property, or are adding to your existing portfolio, it is worth doing your research and understanding the land tax implications for your purchase. Land tax is a substantial fee, which can have a great impact on the returns you can expect to receive from an investment. In order to be properly prepared with the most up-to-date information, consult your financial advisor, and get in touch with a qualified and experienced buyer’s agent, who can help you to achieve the best possible outcome for your investment.