Land tax is based upon the unimproved value of the land and charged regardless of whether your property generates surpluses after costs.
It is collected by the Australian state government to assist with the costs of providing infrastructure and services for property owners.
Steve Douglas, Australian Tax Advisor, answers your questions about land tax.
Many living in Australia are unfamiliar with land tax because it is not charged on the family home in any of the states; they usually only charge for vacant land, or rental and commercial properties.
Land tax is calculated on the cumulative value of all of the property owned by a person in the state of location. So the more property you own in each state, the higher the rate of land tax, which can greatly escalate costs.
If you own property in just one state, check the land tax value on your next purchase to know the potential cost, as any new purchase will increase your tax rates.
Be sure to remember that land tax on an apartment will be substantially less than that of a house, as the unimproved land value is shared with many owners and creates a lower individual value for tax purposes.
Each state has its own system, which can be advantageous if you have property in several Australian states, because you get a new threshold for each state of ownership.
The annual cost can vary from a few hundred dollars to many thousands, and each State Revenue Department is quite active in seeking out non-payers and recouping any land tax arrears.
You should receive an Annual Assessment from the state government where your property is located, seeking clarification on the use of the property and confirming the tax value.
If you think you may have a potential land tax liability, contact your property manager or the State Revenue office to confirm if you exceed the relevant threshold for your state.
If the state government finds you first, the penalties can be quite expensive. Furthermore, it tends to be less willing to reduce penalties, even if you were unaware of your obligation.
A land tax cost isn’t a deterrent to purchase, but it can become expensive if you have built a substantial property portfolio in one state, which will require some consideration when working out your cash flow on your rental property.
It can also be an unwelcome surprise if you have bought a modest house on a large size lot in a very nice area, as, in some cases, the land tax can be a large portion of your annual rent.
Ask the selling agent at the time of purchase about the land tax value and factor in this cost (if it is above the tax-free thresholds) in your cash flow assumptions on the property.
Knowing that land tax is due should not change your investment decisions, as any good house will grow sufficiently to justify the additional cost of land tax. But it warrants a review of your investment strategy to allow for multi-state property ownership and a sensible mix of houses and apartments to keep your taxable land value low.
Make an appointment with SMATS if you need further advice.
Steve Douglas is the Co-Founder and Managing Director of Australasian Taxation Services (ATS). ATS provides specialist taxation services for anyone looking to invest in Australian property, including Australian expatriates living overseas. Areas of specialisation include the Australian taxation aspects of property investment, as well as expatriate and migration planning. Find out more here.
From The Finder (Issue 280), March 2017
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