When you buy your first (or even second) investment property, land tax is likely the last thing on your mind. Even less likely if you are buying a new family home and have decided to keep the old one and rent it out. With land tax rates skyrocketing in some states over recent years, this can be a nasty surprise.
Land tax is imposed by all state and territory governments in Australia, except Northern Territory. Land tax is based on the cumulative value of all unimproved land that you own, other than your principal place of residence, in any particular state. It is calculated on the total land ownership of an individual or entity at 31 December (in most states) each year. Each state/territory government has its own land tax rates and exceptions or surcharges so it is important to check to understand what your liability may be.
A common issue that can arise is where a family decide to upgrade the family home, and rent out the old one. The owner(s) may not realise they need to notify the relevant State Revenue Office of this change in purpose for the property, so land tax might not be levied until the Australian Taxation Office and the relevant State Revenue Office do some data matching – there have been cases where land tax notices are backdated for five or more years! This can pose a significant financial burden to you, the property investor, and potentially even result in having to sell the property to cover the back-taxes (worst case scenario). Hopefully this won’t happen as your property savvy accountant should raise this with you at tax time, to ensure there are no nasty surprises years down the track.
There are a number of ways to minimise your land tax payable: you can purchase in different states; different ownership structures; or chose units or apartments with low land content. You do need to be careful however, particularly when looking at different structures, as some states impose a surcharge if property is owned in a trust and this may negate the other potential benefits of the trust. You will need to look at your own circumstances and investment strategy, and discuss these with your accountant, to determine if these options are suitable for you.
Another common issue arises when the property has been purchased in a trust. After the land tax surcharge for trusts was introduced (in most states) a number of years ago, it is important conveyancers and solicitors submit the necessary form to the State Revenue Office notifying them that the trustee company is only holding the property in its role as trustee for the trust. There have been cases where the ATO data matching has found trusts are not paying the correct rates and people have had to back-pay many years of land tax surcharge which can be quite substantial.
If you would like more information in relation to land tax, please contact our office.
Rebecca Mackie, Partner, Paris Financial
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