What is land tax?
Land tax is a tax on land value. It is based on the accumulative value of all unimproved land that you own, other than your principal place of residence in any particular state.
All states and territory governments in Australia (except the Northern Territory) impose a land tax. In the Northern Territory there is no land tax at all.
Each state or territory government not only has its own tax rate but also has certain exceptions within their laws in regard land tax, so it’s important that if buying interstate that the land tax laws for that state are understood. The office of state revenue websites provides land tax rates for each state.
For some the first one or two properties may not attract much land tax but as your property portfolio increases land tax can become quite expensive and increase the cost of your property holdings significantly.
A commercial property is a good example where there could be a lot of land value, such a large warehouse or retail shop with large floor space.
So how can you minimise land taxes?
There are a number of strategies that can be used to minimise land tax. You should speak to a tax adviser or accountant who can help you evaluate your own circumstances to see if any of these strategies could be of benefit to you.
Let’s look at an example if you held three NSW investment properties with land values of: $50,000, $250,000 and $300,000 so a total land value of $600,000.
Buying property in one or other states
a. If all three properties were owned in NSW, the annual land tax would be $3,008 (calculated as $600,000 – $412,000 x 1.6%) allowing for a land tax threshold of $412,000 for the 2014 land tax year.
b. If all properties were spread over 3 states then there would be no land tax to pay due to the fact that in each state the property value is below the land tax threshold of each state.
c. If they were all situated in the Northern Territory there would be no land tax to pay. Although then you would be taking on the investment market risk linked to that state.
Buy apartments/units instead of houses
It’s quite common that apartments have lower land content than free standing homes due to the shared strata with other apartment owners. For example a block of 30 apartments all share the land together and each owner is allocated a certain percentage of the land value based on their unit position and size (strata) including the common property.
Land tax can be saved using this strategy but there are other expenses you also need to consider to make sure it’s a viable investment.
The cost of paying strata fees, also known as body corporate fees to manage the unit should also be considered. These fees can be higher than the potential land tax of buying a freehold property. If this is the case it may not weigh up as property worth purchasing as it could reduce the performance of your property investment. However other considerations such as potential for capital growth and higher rental income could outweigh the costs of paying strata fees.
Strata fees vary for apartments that have lifts, gyms, pools and park lands that require upkeep.The feasibility of the investment will need to be assessed in great depth and of course is another area where advice should be sought.
Buy properties using different buying entities
Another option is to buy the properties using different entities.
Case study example:
A married couple Dave and Jane work full time as business owners and had three properties with land value of $50,000, $250,000 and $300,000 respectively. If Dave owned one, Jane owned one and the third was owned under a superannuation fund then again, there would be no land tax as there are three different entities owning the properties.
Although this may seem to be ideal, owning only one property in a superannuation fund can be more expensive too as there are set up costs and expenses related to the annual reporting and compliance of the superannuation fund. However other advantages such as concessional tax rates of 15% could also outweigh the costs.
There are also a number of ways you can transfer property into other entities to reduce future tax however these can be complex scenarios and professional help should be sought.
Finally, after assessing these different methods of minimising land tax, you also need to incorporate your overall income and taxation position.
Obviously it’s very important, therefore, that you have a detailed discussion with a Maxmillian Consulting property tax accountant, to ensure everything you do is specific to your own individual circumstances.
For a complimentary tax planning consultation please contact one of our Sydney tax accountants at Maxmillian Consulting on 02 9776 8866 or make an online enquiry here.