The Growing Land Tax Quandary

It never ceases to amaze us the number of times a new client will come to our firm where we discover they have a Land Tax liability, yet the client has never even heard of Land Tax. Chances are if you invest in property you know all too well what Land Tax is, how much it costs and the impact it is having on your cash flow and investment return.

For the uninitiated (lucky you, sort of), let’s just go over the basics. Land Tax is a state-based tax imposed on landowners that hold land valued over a certain threshold. In the state of NSW for instance if you hold land in excess of the tax-free threshold currently at $629,000 you pay a rate of $100 + 1.6% on each dollar in excess of that threshold (or 2% for every dollar in excess of a Premium Threshold currently at $3,846,000). And yes, it’s an annual tax. There is some relief however, the residence in which you occupy as your main residence is generally exempt from Land Tax. So, just to put that into a real dollar perspective let’s go through a scenario:

Land Type Land Value
Main Residence in NSW n/a
Investment Property in NSW $500,000
Investment Property in NSW $500,000

 

In the above scenario the landowner holds taxable land value of $1m which is $371,000 above the tax-free threshold. So, based on the current rates the land tax bill for this landowner would be $6,036, annually (ouch!).

The recent property boom in NSW has proved to be extremely lucrative for the NSW Government as Land Tax and Stamp Duty collections have increased with the property boom, although for property owners it has thrown a major spanner in the works when it comes to making any property transaction decisions. Given that property is one of the favourite investment classes for Australians the property boom has seen many people that have property investment portfolios significantly question their strategy and/or have to sell down property to improve their cash flow.

To illustrate this point consider this real life scenario. A client purchased a parcel of land (5 acres) approximately 20 years ago which was in a rural area at the time with no sign of infrastructure or investment in the surrounding areas. The goal, hold onto the property until developers come along and acquire the land. Fast forward 20 years the clients only other property in NSW is their main residence (which is exempt from land tax) however there is more and more development in the suburbs surrounding the land held. The client never built a house on the block nor used the block for agricultural purposes so it has never been income producing. Given the development in the surrounding areas the most recent valuation of the land was in excess of $2m and over the next year or two we are estimating the land tax bill to be in excess of $20k per annum. Given the client earns approximately $120k in salary the land tax bill at 1/6th of their annual income is becoming a massive burden (and note Council rates are also payable on top of this) and the strategy which has been in place for over 20 years to hold out for a developer to come knocking is increasingly in jeopardy due to the Land Tax assessment.

We think this illustrates the main point being that investors need to be more and more aware of Land Tax when making investment decisions and before making any decisions its always wise to speak to us regarding ways to structure your investment portfolio or how to use and operate your investment assets to best maximise your investment returns.

This article is general in nature and should not be relied upon in making an investment or tax related decision. We strongly recommend you seek financial advice prior to making any decisions.

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