How Does Land Tax Affect Selling Your Investment Property?
It is not often there is good news when it comes to bills, especially when putting your property on the market.
With additional expenses such as removalist costs, storage hire and legal fees, homeowners can take comfort in knowing they don’t have to worry about land tax when selling their primary residence. In fact, it is likely that they will never have to pay it.
So, what is land tax, who pays it and are there ways to minimise it? Let’s take a look.
What is land tax?
Land tax is an annual fee applied to land or land-related interest as of midnight on December 31. Each Australian State and Territory sets its own rules and threshold for how land tax is assessed and collected.
The amount due is calculated based on the value of the land alone, usually by the Valuer General, excluding any building or structures on it.
Land tax can be applied to a wide range of property types, such as freestanding homes, apartments, villas, and commercial and industrial properties. It can also be payable on car spaces, factories, shops, warehouses, investment properties, holiday homes, vacant land (including rural) and land leased from the State or Federal Government.
While the owner of any land is potentially liable to pay land tax, there are some exemptions. This can include a principal place of residence, primary production land and land used for boarding houses and aged care depending on local regulations.
The only exception is the Northern Territory, which has no land tax.
Who pays land tax in Australia?
Land tax primarily targets investment properties and is triggered when their total taxable value is above specified thresholds.
It can be applied to individuals, companies and trusts so knowing how your property portfolio is structured is important. There may also be additional surcharges for properties owned by a person not residing in Australia or a foreign corporation.
Specific limits for land tax are set by each State and Territory and can be subject to change.
In Victoria last year, the State Government increased their land tax threshold. This resulted in many investors, particularly those with higher-valued property, selling up and looking to purchase in other States with a lower land tax. Property prices also fell in popular tourist towns such as Mansfield, Ballarat and Glenelg, with holiday homeowners and investors selling due to the tax and cost-of-living pressures.
LJ Hooker Head of Research, Mathew Tiller said such changes to legislation highlighted the importance of investors spreading their portfolio across different States to minimise the impact of land tax hikes.
“The increased threshold resulted in some investors selling as it was an unexpected extra cost they hadn’t factored in, but we are now seeing due to affordability investors starting to enter the market and adjust their strategies to include this expense,” he said.
This year, the Vacant Residential Land Tax has also been expanded to be applied to the whole of Victoria and not just inner and middle Melbourne. Vacant land that is unoccupied for more than six months in the preceding calendar will incur an additional bill in addition to land tax.
Are there any ways to minimise land tax?
With varying rules and thresholds across Australia, having strategies to reduce tax and understanding your liabilities can make a difference. This includes exploring tax-effective structures, optimising property holdings and staying informed on any legislative changes.
Land tax requires self-registration, which is essential to be aware of as many people forget and then find they are backdated with debt. So, even if you have not received a notice of assessment, make enquiries about how much you owe. Other ways to minimise land tax include:
Buying apartments
Apartments generally have a lower land component than freestanding houses. In some developments, they may pay very little land tax depending on how it has been calculated. This means you may be able to own multiple apartments before reaching the specified threshold.
Use a separate entity like a fixed trust for property purchases
Land tax is often assessed on the total value of land held by an individual or entity. By placing investment properties in a fixed trust, the holdings may be split among the beneficiaries. It is important to seek independent tax advice including the rules on how entities are treated in each State or Territory.
Consider the timing of sales and purchase of land and the date of assessment
If you are selling a property, ensure that you settle before the Land Tax assessment anniversary. If you are selling property, just be mindful that you may still be obliged to pay the Land Tax for the following year, if you have not settled before this date. Some states may offer an exemption in this instance.
Acquire properties in several states
If all properties were owned in one state, let’s say NSW, you would normally exceed the Land Tax threshold. If, however, you spread your investment properties over several states, then there would be less Land Tax to pay. Always seek independent tax advice when setting up a property portfolio.
What is the difference between States and Territories
It is important to remember that land tax is generally calculated only using the land value without any buildings or other improvements. Each State and Territory has different thresholds.
New South Wales
The State Government announced a freeze on calculating land tax until 1 June 2027. The current rates are a general threshold of $1,075,000 and a premium threshold of $6,571,000.
https://www.revenue.nsw.gov.au/taxes-duties-levies-royalties/land-tax#heading5
Victoria
When the taxable value of the non-exempt land you own is equal to or above $50,000 threshold ($25,000 for trusts) you are liable to pay land tax.
Queensland
Land tax is payable if the total taxable value of freehold land – comprising land owned solely and your share in land owned jointly with others is $600,000 or more.
South Australia
Land tax is payable if the total taxable site value is more than $732,000
https://www.revenuesa.sa.gov.au/land-tax/rates-and-thresholds
Western Australia
Land tax is payable if the aggregated taxable value of land is more than $300,000
https://www.wa.gov.au/organisation/department-of-finance/land-tax-assessment
Tasmania
Land tax is payable when the total land value is $125,000 and above.
https://www.sro.tas.gov.au/land-tax/rates-of-land-tax
Australian Capital Territory
Land tax is assessed quarterly and is made up of a fixed charge and a valuation charge. The AUV is the average of the property’s unimproved value over a number of years.
Northern Territory
There is currently no land tax.
Does land impact sales price?
Investing in property is an exciting opportunity and a popular way to build wealth. When you are ready to add to your portfolio, be sure to consider the impact of potential land tax responsibilities.
While land tax itself doesn’t directly affect your investment property’s sale price, Mr Tiller said it is important to factor it into your total investment costs and long-term strategies.
“It shouldn’t impact a property’s sale price or appeal however, it’s about managing your ongoing holding costs and overall investment,” he said.
It is also essential to be a tax-smart investor and adopt a business-like approach to your investment. This means getting all your documentation in order from the start. This includes knowing what expenses can be claimed and declaring all rental-related income in your annual tax return.
If you are looking to add to your portfolio or sell an investment property, speak to your local LJ Hooker. They will be able to provide you with detailed insights into your target market.
DISCLAIMER - The information provided is for guidance and informational purposes only and does not replace independent business, legal and financial advice which we strongly recommend. Whilst the information is considered true and correct at the date of publication, changes in circumstances after the time of publication may impact the accuracy of the information provided. LJ Hooker will not accept responsibility or liability for any reliance on the blog information, including but not limited to, the accuracy, currency or completeness of any information or links.
