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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.