4 Ways to Minimise Land Tax
If you own a business, you know that linear income, which is a one-time sale, is good, but residual income, which is a recurring sale, is the golden goose.
For your state or territory’s revenue office, land taxes are the golden goose. That’s’ because taxes are a recurring annual levy on the value of your unimproved land holdings.
In general, your principle place of residence, or farmland you use for production, is exempt from land tax. However, if you own vacant land, a holiday house or investment properties, you may be liable for the levy, depending on the total value of your land holdings.The state determines the value of your land based on the figure that appears on your council rates notice.
The revenue office calculates the exact amount of land tax that you owe by selecting the appropriate tax rate from the scale of tax rates for your state or territory.
They then apply this rate to the total taxable value of all land you own, excluding any exempt land. Some states also have different rates for individuals, companies or trusts.
Click the link to see your state or territory’s land tax rates:
In addition, the revenue office bases your land tax on the value of all of your land in a particular state, as of midnight on the 31st of December. For example, the 2015 assessment, which you can expect to receive sometime between February and May of this year, is based on land holdings as of midnight on 31 December 2014. So, if you settle on a property in December, the property could contribute to your total land tax bill the following year.
I once heard a lady passionately condemn anyone trying to minimise land tax payments. Her case was that all of society contributes to the value of land, not just one particular landowner. Therefore, all holders of land have a debt to society they must repay.
While I will abstain from offering my opinion on this particular viewpoint, I will assume you at least in part disagree, and you want to know how to keep a little more of your own money in your pocket.
Here are four ways you could potentially minimise your land tax obligation:
1. Own Land In The Northern Territory
1. Own Land In The Northern TerritoryThere currently is no land tax in the Northern Territory. You can buy property there to your heart’s content, and you’ll have no obligation to pay this annual levy.
That’s not to say that they won’t reach deeper into the pockets of investors in the future, but for now, you’ll get to keep a little more of your cash if you choose to invest there.
2. Spread Your Portfolio Of Assets Across Multiple States
A common strategy for investors to minimize land tax is to own property in multiple states. Because the state revenue office can only assess the value of unimproved land in their own state, by owning land in other states, you can potentially keep yourself in a lower scale of tax rates.
For instance, this year’s land tax threshold in New South Wales is $432,000.
If you own two investment properties in New South Wales with a combined land value of $430,000, and you buy a third investment property this year in Victoria with a land value under $250,000, you’ll have no land tax payable.
If you had purchased the third property in New South Wales, you would have exceeded the threshold.
Depending on the value of the land and the threshold in each state, you could theoretically own one property in every state, and not be subject to land tax. Conversely, by buying all of your properties in one state, you are not able to take advantage of the land tax thresholds of the other states.
3. Invest In Units Or Apartments Instead Of Homes
I wrote here about why investing in a unit or apartment, rather than a home, may not be a good idea for other reasons; however, if you only care about saving on land taxes, you could buy properties with a smaller land component.
They base the land tax exclusively on the value of unimproved land. The revenue office does not take the value of a dwelling into consideration.
So, if you own a unit or an apartment, a smaller percentage of the overall value will be in the land, which means you’ll pay less land tax than on a home on a larger block, assuming the property has the same overall value.
Keep in mind; however, that units and apartments also come with other costs, like body corporate fees, which can erode your cash flow. Also, in most cases, the future capital growth of a property has more to do with the land component than the dwelling, which depreciates over time.
4. Buy Properties In Different Names
When it comes to assessing land tax, each individual has a tax-free threshold. Depending on the laws of your particular state, you might be able to minimise your land tax costs by spreading the ownership of properties around in different names.
The land tax rates for most states are not linear. In other words, the greater the value of your portfolio of assets in that state, the higher percentage of its value you will pay in land taxes. If you can hold these assets in different names, you can potentially keep your holdings below the lower thresholds and save some money.
For example, if you own six properties in Queensland, you could hold two properties in your name, two properties in your partner’s name, and two properties in the name of a company or trust.
Keep in mind, however, that if you’re investing in different company or trust structures, most states do not honour the threshold for each entity, but only for each individual. If the same individual controls or manages the same entities, the taxable land value could be combined, offering little or no land tax savings to a person by using this strategy.
I’ve heard Queensland is the most generous with their laws related to the thresholds of different entities. Check with your tax professional to be sure.Also keep in mind that there are heaps of other considerations besides land tax when it comes to structuring, so be sure to do your research.
Conclusion
Land tax is an important factor when considering the bigger picture of your investing strategy. However, it’s never a good idea to base your investment decisions solely on what will save you the most tax.
There’s no point in saving a few thousand dollars in tax at the expense of tens or hundreds of thousands in profits in the long-term.
Finally, I’m not a tax professional, so don’t make any decisions based on what you read here. Engage a qualified and experienced accountant who can consider your specific situation and recommend a suitable strategy.
That said, thanks to Steve McKnight’s background as an accountant, he delves quite deeply into the various tax and legal consequences of investing in real estate in his Property Apprenticeship course. Many of our students have shared how Steve’s course has given them much greater confidence when meeting with their solicitors and accountants.
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