You may have heard of the term “land tax” when discussing property investing. Though, many new investors may not be fully aware of what this is and how it works. So, what is this tax, and will it affect you if purchasing property?
What is it?
Land tax is an annualised levy charged by the government for property ownership. The amount charged changes depending on the amount of land owned. In Australia, this tax is broken down into states rather than taxing land on a national basis. The implementation of this tax is supposedly used to reduce inequality. By charging landowners this fee the government can aim to help minimise the wealth gap as mostly the “wealthy” have a large proportion of land ownership.
Who pays it?
Not everyone is charged for this type of tax so who has to pay this tax? Property investors are those who are charged with this fee. Fortunately for homeowners, they are able to make their principal place of residence (PPOR) exempt from land tax charges. However, if a homeowner also owns investment properties they can be charged for their investments. The distinction can be made between the use of the property. If the property is an investment, it will be added to your total land ownership, and you could be charged for this.
How is it calculated?
The calculation of land tax is determined by the amount of land owned. Each property has a land value which is calculated by the government. This is calculated by the land size and location of the land. Note, that the land value does not take into account the value of the dwelling on top of the property. For example, if a property is valued at 500k it may have a land value of 300k. Therefore, only the 300k will only be added to your total land ownership, not the 500k. This means you’re only charged for the value of the land, not the total property.
Moreover, as mentioned previously, it is calculated per state. Therefore, you might have numerous properties across numerous states. However, your tax will only be calculated per state and not as a total amount. Moreover, each state has its own land tax threshold. This means there is a minimum amount of land needed to be owned in order for someone to pay land tax. The more land you own the larger your land tax bill will be.
What are the thresholds?
Across each state, the threshold changes and it can be confusing to know what your land tax will be. The following table shows the land tax threshold for each state.
|
Land tax threshold each state (2021) |
|
|
New South Wales |
$755,000 |
|
Victoria |
$250,000 |
|
Queensland |
$600,000 |
|
South Australia |
$482,000 |
| Western Australia |
$300,000 |
| Northern Territory |
No tax |
| ACT |
$0 |
| Tasmania |
$50,000 |
As you can see the threshold for each state vastly changes across each state. Note, that the value of land across these states also largely varies and hence why there could be such a large range of thresholds. If you want to calculate your own tax you can visit your state’s government website which will have an online calculator. Using this you can determine your annual state tax based upon your land ownership.
Should I try to avoid it?
Attempting to (legally) avoid tax can benefit the investor by minimising their expenses. This can be achieved by purchasing properties across numerous states without meeting the minimum threshold. This can be difficult to do in some states which the land tax threshold is extremely low. However, by strategically purchasing an investor could minimse these expenses. Another alternative would be to purchase in different names if you have a significant other. This would allow the couple to own twice as much land before reaching the state threshold.
The verdict
Land tax is an additional expenses investor need to think about when purchasing a property. If looking to build a significant property portfolio it is a consideration an investor needs to think about before purchasing. Unfortunately, the only way to minimse your land tax threshold is to purchase across numerous states, within different names, or minimse the value of the land owned. Although, an investor shouldn’t change their investing strategy just to avoid this expense. This expense is simply a part of doing business within property investing. Though, by understanding this concept and its costs an investor can integrate this expense into their cash flow analysis.
