How to minimise land tax

Land tax is a tax imposed by all state and territory governments (except in the Northern Territory where no land tax is imposed). The tax payable is based on the combined unimproved value of all the land you own.

In other words, it is calculated on what all your land would be worth if it was vacant. Land tax is payable on property you own, other than your principal place of residence. There are a few exceptions to this rule and they vary from state to state.

With the large increases we have experienced in property values over recent years, land tax has become a greater burden to many Australian property investors. I am often asked how investors can minimise their land tax liability. I have found that the three most common methods are:

Invest interstate

• Purchase properties in a variety of entities

• Buy units instead of houses

  
  

As land tax is calculated on the land you own within one particular state, it makes some sense to buy properties in other states so as to spread the land values across states.

Let me illustrate with an example. Imagine you owned one or more properties that had a total land value of $750,000.

Scenario 1: If it was all in Tasmania, you would pay $9,837.50 in land tax.

Scenario 2: If it was all in South Australia, you would pay $5,420.

Scenario 3: If one of your properties was in NSW and the land value was $350,000 another property was in Victoria and the land value was $200,000, another was in South Australia with a land value of $100,000 and your fourth property was in Queensland and it had a land value of $100,000, your land tax liability is $0.

Scenario 4: If it was all in the Northern Territory you would pay $0.

As you can see, spreading your investments across states and territories can impact on your land tax greatly.

Purchase property in a variety of entities

The land tax is allocated to the owner of the properties. You can minimise your land tax liability by owning properties in different entities.

Let’s use an example to clarify this point. Ben and Anna Smith invest in Queensland. Property A has a land value of $200,000. Property B has a land value of $150,000. Property C has a land value of $100,000 and Property D has a land value of $150,000. This results in a combined land value of $600,000. If they didn’t want to pay any land tax, one property could be in Ben’s name, one in Anna’s name, one in joint names and the fourth in the Smith Family Trust. Technically there are four different entities and neither of the entities owns more than $600,000 of land ($600,000 is the threshold at which land tax is payable in Queensland). As a result, no land tax is payable in this scenario.

However, if all four properties were owned in one entity only, their land tax bill would be $500.

Question: Is it worth setting up different entities to save on land tax?

Answer: It depends on how much property you own.

In the above example, the Smiths would have saved $500 in land tax if they put each property in a different name. However, the accounting fees to set up a trust and monitor it every year could be more than $500.

If the Smiths’ combined land values equalled $599,999 instead of $600,000, their land tax liability would be $0.

However, if their combined land value was $1,000,000, then their land tax liability would be $4,500.

Buy units instead of houses

As land tax is based on the value of the land only, it seems to make sense to buy property which has a relatively small land component. For example, a $400,000 unit may only have a land value of $100,000 whereas a $400,000 house could have a land value of $350,000. In South Australia, the $400,000 unit with $100,000 land value attracts no land tax but the $400,000 house with $350,000 land value has a $720 land tax liability.

At first glance it would seem that buying a unit is the best option. However, the $720 of land tax is probably less than the annual body corporate fees that you would have to pay if you owned the unit.

The three methods described above are the most common ways to minimise land tax. However, land tax is only one aspect of investing in property. You should not focus solely on land tax and the above methods as there are some negative aspects to each of these methods.

If you invest interstate, you will probably have to pay property management fees but if you invested where you live, you could manage it yourself and save on the fees. Owning property in a trust means you can’t offset any losses from your personal income. However, the property in a trust is protected if you are personally sued. What about the capital growth you could be losing if you invested in units instead of houses?

In summary, there are two steps I would strongly encourage you to take if you are concerned about land tax. Firstly, check the rate of land tax that is applicable in your state or territory. Secondly, speak to an accountant before you purchase property as they will be able to explain all the tax implications of investing in property. If your accountant doesn’t know much about property investment, find one that does.

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Want to know more? Listen to the podcast

Understanding my land tax – Cash flow and diversification overview (Ep.108)

Land tax basics

Land tax is an annual cost that is determined on the total value of the land you own, (with the exception of a principle place of residence). Unlike Capital Gains Tax, Land Tax is a state tax, with differing thresholds, tiers, rates and methods of calculation between each state. Another layer of complexity are the differing rates and thresholds for owning property in trusts or in a company. As you acquire property, you need to be mindful of your ever-growing land tax bill, and this is often not factored into cash flow costs when people make property decisions. The trio also discuss and explain how land values are calculated for tax purposes.

Tax on unimproved value

Each year the Valuer-General evaluates the ‘unimproved value’ of the property, meaning the land portion without the dwelling. Funnily enough, the only time you want a conservative estimate of value is on your land tax bill and council rates notice. If you disagree with an estimate, you normally have 30 to 90 days to challenge it, and if found in your favour, this could save you thousands of dollars. More often than not, the value that the government apportions for your land is not what the market would give you. Where this will hurt, is in a falling market. Although you’re more likely to be eligible for a re-assessment in this case.

The friendliest land tax states

The trio outline the differences in land tax for each state. Which states have the lowest tax-free threshold? And which states offer the friendliest environment for building a property portfolio. Before you purchase your next property, you should be broadly aware of the land value component, and you should try to determine many properties you will accumulate over your life-time in each state. Having a plan that factors in land tax, helps an investor provision for cash flow obligations.

Tax decisions drive investment choices

Political, financial and economic discussion is often centred around tax and it’s implications. States may increase taxes, and this has potential to impact the level of investment, (both private and consumer-based investment), and in turn this can create a flow-on effect on unemployment, property value growth and wage growth.

The pitfalls of land tax

The Property Buyer explains two of the ways that the operation of land tax can be unfair, particularly towards home buyers and absentee owners. If you’re purchasing a home or planning to live overseas for a period of time, ensure that you understand the potential land tax implications.

Diversification

As well as land tax benefits, purchasing property in another state can provide you some much needed diversification in your property portfolio. This will mitigate the risks associated with property cycles and can also counter-balance the risk when one property market is going through a downturn or period of stagnation. Right now, we’re in an atypical situation where all markets are increasing at the same time, and while it’s extremely positive, it doesn’t happen often.

Developing your property strategy

Land tax is important to understand and take into account, as your net income position and retirement nest egg can be greatly impacted by your decisions. If your cash flow is tight, a big land tax bill could send you over the edge of affordability. However, your decision shouldn’t be solely based on tax considerations alone. Tax is just one of the plethora of puzzle pieces and moving parts to understand before making a decision. The Property Planner takes you through some scenarios to better understand your cash flow and income position.

The land tax bomb

The Property Professor goes through the last 10 years of property market data and illustrates how selecting the states with the low-tax environments may not be the best choice for capital growth. Depending on your strategy, it may pay in the long-term to purchase property in a state with higher land tax and foot the bill.

Land tax scenarios

Scenario 1 – Unimproved land value $1M

Property value $1.5M x 3% rental yield = $45,000 rent / @ 4% = $60,000

• Land tax $3k to $5k in most states or around 5% to 10% of your rent.

• Except for ACT and Tas where it is 15% to a whopping 25%

• Cost to rental income – Range 5% to 25% / 1$ paid out in $20 to 1 in $4

Scenario 2 – Unimproved land value $2M

Property value $3m x 3% yield = $90k rent / @ 4% = $120k

• Victoria is approx. 10% of income spent on land tax and this the lowest

• WA is 12% to 15% One is every 6 to 8 dollars goes towards land tax

• All states above $20k bill except the two above

• The rest of the stats are around 15% to 30% with SA and Tas paying $26k and $27k

• Cost to rental income – Range 10% to 30% / 1 in $10 to 1 in $3.33

Scenario 3 – Unimproved land value $3M

Property value $4.5m x 3% yield = $135k rent / @ 4% $180k rent

• Victoria is 14% to 20% is the lowest Or $1 paid out of every $5 to $7 earnt

• SA most expensive is $1 out of $3 or $4 or even high $2’s.

• Other states – $1 out of $3 to $6

Summary

Victoria is the most forgiving currently, but this can change anytime. I would be surprised if a Victoria government didn’t increase it to be more in line with other governments over time.

SA is the most expensive at the top end.

Some cities, such as Sydney and Melbourne, land value is much higher, so land tax grows more rapidly potentially whilst owning less properties.

A higher land to asset ratio, although positive for capital growth appreciation, will mean more land tax is payable when owning the same value of property as someone with a lower land to asset ratio.

The higher the land value, the more important the rental yield can become/less reliance you want to have on the rental yield. EG you are wealthy enough, that it isn’t so important to you.

Show notes

• Land tax is often not factored into cash flow cost when people are purchasing property.

• Once you start to own a certain number of properties, you always want to be aware of the land tax implications, as part of determining the next property purchase and location.

• Land tax basics – how is land value assessed?

• Every year, the Valuer-General evaluates/determines the ‘unimproved value’ (i.e. land value) of property.

• Land tax is an annual cost that is determined on the total value of the land you own.

• They are almost always conservative.

• As soon as you get that estimate, you only have 30 to 90 days normally to challenge it. That can certainly save you thousands, if the algorithm has over-estimated the value of your land.

• Uncertainty – the value of your land is constantly changing, the government charges can change, Victoria have just changed theirs. Victoria does theirs over the calendar year, some do it over the financial year.

• Before you purchase your next property, you can’t be completely certain on the land value, and you can’t know for certain how many properties you will accumulate over your life time.

• Having a plan that factors in land tax and helps mitigate that expense is certainly worthwhile.

• Tax decisions drive investment choices

• So much of the political, financial and economic discussion is about. State’s may increase taxes, but it will change the level of investment, which can impact unemployment, growth of property and growth of salaries.

• Land tax free thresholds:

• ACT you pay from Day dot, this is because they are trying to abolish stamp duty.

• NSW – $755,000 is the land tax free threshold – although NSW gets more expensive the more property you have, if you only have a small portfolio, it will be cheap.

• Because it is a tiered system, once you go above $2M, SA is the most expensive.

• The pitfalls of land tax

• In Victoria, need to reference if it is taking place in other states as well. If a first-time buyer purchases a property that has land tax obligations on it, they will pay the residual land tax bill, because that is how the legislation is worded.

• Absentee owner land tax rate – if you live outside of Australia, expats or travellers, there will be an absentee surcharge. It is 2% of the property’s value each year.

• How does land tax vary if you own it personally or in a trust?

• Land tax thresholds start at a lower level if you own it in a trust or a company. A lot of investors who have property in their own personal name have a higher level that land tax kicks in it.

• How are land values calculated for rating and taxing purposes?

• Curbside valuation, typically it’s an algorithm, could be a land value per square metre portioned to a particular suburb. We talked about valuing like a professional in the last episode, and we know how much you need to take into account to do this.

• It’s not a detailed valuation, it’s a blunt instrument.

• More often than not, the value that the government gives you for your land, is not what the market would give you. Where that will hurt is in a falling market. Then you’re more likely to want to look at the land assessment, it’s more likely that you’ll be eligible for a re-assessment.

• Your strategy has to take tax into account, but shouldn’t be hinging on the land tax benefit. If your cash flows are tight, this could tank you.

• It can make a big difference to your net income position at the end.

• Diversification helps you manage property cycle risk, we’re in an unusual situation where all states are increasing at the same time.

• The Property Professor’s land tax bomb

• NT – $0 land tax – BUT properties are worth less than they were 10 years ago.

• WA – low land tax environment, BUT property values are up 2% in 10 years.

• NSW – if you purchased a $1M property 5 years ago, it would be worth $1.78, even though you had to pay $40,000 in land tax annually over those 5 years.

• Diversification

• Land tax should also be a consideration for diversification. As land tax is a state-based tax, a strategy to minimise land tax could be to purchase in different states, cities and regional areas with the land value likely to be lower and rental yields usually higher.

• This diversification can also help you own property in locations that are running on different property cycles. (it is unusual for a cities and regional areas to be increasing in value at the same time as it is currently.)

• PPOR – Generally speaking, your Principle Place of Residence is exempt from land tax calculations

Please note, all examples and calculations were accurate at date of publication.

© Other Media articles — www.propertyplanning.com.au.

Reproduced with permission.