Land tax has increased substantially for many clients this year. I therefore thought it was worth reviewing the basics of land tax.
Land Tax Liability
Land tax is assessed on the basis of the unimproved (or site) value of the land you own as at midnight on 31 December each year. If you buy or sell property after 31 December, it does not affect your land tax assessment until the next 31 December when the next land tax assessment is raised.
Your principal place of residence is usually excluded from the total value.
|Property Holdings||Land Tax|
|$250,000 to < $600,000||$275 plus 0.2% of amount > $250,000|
|$600,000 to < $1,000,000||$975 plus 0.5% of amount > $600,000|
|$1,000,000 to < $1,800,000||$2975 plus 0.8% of amount > $1,000,000|
|$1,800,000 to < $3,000,000||$9375 plus 1.3% of amount > $1,800,000|
|$3,000,000 and over||$24,975 plus 2.25% of amount > $3,000,000|
The above thresholds have not been increased or indexed for a long time – although the actual rates were reduced somewhat in 2009 (standard land tax rates exclusive of surcharges).
To put this in context, total land tax revenue was $1.2 billion in 2008/9, increased to $2.6 billion in 2017/8 and is forecast to increase to $3.6 billion in 2019/20.
Put another way, if you owned, in a trust structure, two investment properties valued at $320,000 (each) (the median house price at the time) in 2005 (pre introduction of the land tax surcharge for trusts) your land tax bill would have been $1,380.00. In 2019, assuming a median house price of $800,000 your land tax bill would have increased to $13,488.00 – nearly 10 times as much as 2005!
Land tax revenue has skyrocketed because the Victorian Government has not increased the thresholds to reflect recent large increases in property prices and also as a result of the introduction of surcharges for properties owned by trusts, properties owned by ‘absentee’ landlords (mostly foreigners) and vacant properties.
The Future of Land Tax
I don’t believe that the growth of land tax will stop in the near future although the current downturn in property prices will reduce the growth in the short term.
The State Revenue Office is collecting much more information that ever before and this will improve the ability of the State Revenue Office to group land owners and thereby push land owners into higher land tax rates. ‘Grouping’ means treating related land owners as one single land owner for land tax purposes.
At a policy level, there are proposals to increase land tax to allow stamp duty to be phased out and to bring in quarterly land tax assessments.
However, the more land tax collections increase, the harder it will be to use them to fund the abolition of stamp duty. In our example above, even a modest property portfolio is incurring land tax of 0.8% per annum – which given low rental yields is a sizeable proportion of the total income from the property.
Reducing Land Tax Liability
There are a range of steps that you can take to reduce land tax bills. These include:
- Apartments tend to have a lower unimproved land value than traditional houses;
- Terms Contracts – property sold under a genuine terms contract to an independent third party can be excluded from your land tax assessment – but you may need to lodge an objection to do this;
- Principal Place of Residences are generally exempt from land tax. If you have moved into or out of a property this may impact your land tax assessment;
- Structuring – carefully considering your structure prior to property purchase can help manage your land tax liability;
- Objecting where land values exceed market value;
- Unit Trusts may be able to avoid the land tax surcharge by passing the liability back to unitholders; and
- Off the Plan Sales – developers can insert special conditions into off the plan sales contracts that maximise the land tax they can recover from purchasers.
Increasing land tax adds to the cost of funding buy and hold property portfolios. With low rental yields and the increasing unavailability of interest only loans it makes the traditional buy and hold property portfolio much more expensive to maintain.
Contact us today to discuss how Lewis O’Brien & Associates can assist you.