Tax-burdened landlords face years with no rent increases
By Matt Wade and Ellen Connolly
April 9, 2004Landlords may have to wait years to lift rents to recoup new state land taxes, economists have predicted.
Property tax changes in this week’s mini-budget raised fears that investors would pass on the costs to tenants. But a glut of rental properties, especially flats, is expected to keep the lid on rents.
AMP chief economist Shane Oliver believes it could be five years or more before landlords in many areas can charge more.
“Investors might try to push rents up but given the condition of the rental market I don’t think they will be able to. Investors will just have to wear it.”
Last year, rents rose only 1.9 per cent – well below the inflation rate – and rental yields, after expenses, have slumped to lows of about 2 per cent, says the Reserve Bank.
A flood of new development will not help investors’ returns. ABN Amro economist Kieran Davies estimates more than 100,000 houses and units are under construction across Australia and latest building approval figures revealed an unexpected jump in flats given the go-ahead in February.
The decision to abolish stamp duty for first home buyers spending up to $500,000 may also hurt investors. It gives renters a chance to buy a home, reducing the pool of tenants.
However, industry figures and tenancy advocates say landlords will lift rents as soon as possible. The president of the NSW branch of the Real Estate Institute of Australia, Rowen Kelly, said: “We’ve worked out that most landlords will pay at least $1000 per annum [in extra land tax] and because most of them are negative-geared and are already subsidising the investment, they won’t have the ability to subsidise it further so they’ll put up the rent.”
Rental properties could also dry up as investors opted to buy interstate, he said.
The Tenants Union of NSW holds similar fears. “It’s definitely a likely scenario that landlords will pass it onto tenants,” said Elizabeth De Freitas, a tenancy advocate for Sydney’s inner west. However, she said landlords would claim a tax deduction for the cost of land tax, so blaming it for raising rents was “double-dipping”.
But Citigroup economist Paul Brennan says landlords who expect to lift rents immediately will be disappointed. Conditions for landlords will eventually improve, “but it’s not going to happen quickly.”
Housing loopholes stay open, for now
By Brian Robins and Lisa Pryor
April 9, 2004Buying a second property in your partner’s name is one of the easiest ways to navigate around the tax changes outlined by the Carr Government this week.
Or buying rural property.
And if both you and your partner already own your home in both your names, and then buy an investment property with land value of about $500,000, you will be $1000 better off under the new land tax rules, since your land taxes liability in future will cost only $2200 a year, down from $3300 at present.
Under the revamp to property taxes, you are better off if the land portion of your investment property is worth more than $410,000. The previous flat rate of 1.7 per cent kicked in once the land value topped $317,000.
As land prices have risen over the past few years, a diminishing band of holders of investment properties have been able to stay beneath the $317,000 threshold, especially investors holding houses. But buyers of properties of up to $600,000, which is where the full level of stamp duty applies, may face higher prices.
Sydney accountant Darren Hooper said: “For a $500,000 property, this means [potential buyers] line up the finance, and can afford to pay $485,000, setting aside the $15,000 for stamp duty.
“Now, people will bid up to the $500,000 exemption limit, so the benefit will flow through to the vendor. The changes will be terrific for vendors up to $600,000, which is where the full level of stamp duty kicks in, but it won’t help State Government revenues.”
Investors facing a 2.25 per cent exit levy for the first time could avoid the tax by kicking out tenants before they sell and move in themselves so they can declare the property their principal residence.
To close this potential loophole, the Government may have to set a waiting period before you can call an investment your home, said Neil Warren, associate professor of economics at the University of NSW’s taxation studies program.
“The Government can get around that by saying, ‘you’ve got three months or six months or 12 months’ but the question is how much time they’re going to give you.”
But if you are going to make the move, it better be convincing. Michael Dirks of the Taxation Institute of Australia said the tax man may not be convinced “if you haven’t changed your electoral roll, moved your furniture in and enrolled the kids in the local school”.
And there will be an incentive for buyers of high-end properties to request that the seller include a separate charge for “goods and chattels”, to help get the price paid for the property below $3 million, the level where the premium property tax kicks in.
The portion that a property exceeds $3 million is subject to an onerous 7 per cent duty, boosting the incentive for buyers to get around property prices rising above this level.
At present, the premium property tax kicks in at $1.97 million.
Property experts speculated this could only be achievable where properties are worth around 10 per cent over the $3 million trigger level, with a separate treaty reached for furniture and other inclusions to cover the excess.
Buyers advised to rip up their contracts
By Sean Nicholls
April 9, 2004The NSW Treasurer, Michael Egan, has a solution for those first-home buyers who bought before the cut-off date for the abolition of stamp duty but have yet to settle their paper work: tear up your contract and start again.
Mr Egan this week reassured buyers that doing so was legal, as long as both parties agreed.
“My advice from the Office of State Revenue is that we would actually have to introduce legislation . . . to stop people replacing a contract.”
John McIntyre, president of the NSW Law Society’s property law committee, said there was widespread confusion about the new property tax laws.
“You wouldn’t have to be a very unscrupulous vendor to say, ‘I’ll agree to do it and I’ll split the $14,000 stamp duty with you and the price [of the property] goes up seven thousand’,” he said.
A spokesman for Mr Egan said: “Where an earlier contract has been rescinded and provided settlement has not occurred, replacement contracts will be considered for First Home Plus.”
Small investors flat out paying new land tax as the dream turns nasty
By Barbara Drury
April 9, 2004The Legions of small investors who bought an investment unit in Sydney during the recent property boom are likely to be the biggest losers under the State Government’s land tax overhaul.
Not only are many of them facing a potential capital loss and reduced rental income from their property as the housing bubble deflates, but they will be hit with land tax for the first time from December 31.
John Edwards, managing director of the property research firm Residex, said about 13 per cent of NSW dwellings would be caught in the land tax net for the first time, given that 26 per cent of properties in the state were owned by private landlords and close to half of them had land value below the old land tax threshold.
Under the old rules only properties with land value above $317,000 were liable for land tax.
In Sydney, the median land value is about $349,000, making it likely that owners of investment units and cheaper housing on the city fringes and in regional areas will bear the brunt of the broadened tax.
The new land tax rates are 0.4 per cent on land values below $400,000. A land value of $400,001 to $500,000 will attract tax of $1600 plus 0.6 per cent on the value of land above $400,000, while land values above that will attract tax of $2200 plus 1.4 per cent on the value of land above $500,000.
Hence, someone with an investment unit with land value of $300,000 will pay land tax, for the first time, of $1200 (see table).
The picture is a little brighter when income tax is taken into account because land tax is fully tax deductible on investment property, provided the investor has enough income to claim against.
Using the example above, an investor on the top marginal tax rate of 48.5 per cent (including the Medicare levy) would in effect pay only $618 of the $1200 land tax bill. Someone on the 42 per cent marginal rate would in effect pay $678, while an investor on 30 per cent would pay $822.
A tax partner at KPMG, Fiona Giuseppi, said Sydney rental returns were low, and investors already had a lot of other deductions for things such as interest, repairs and maintenance, and council rates. That meant those on relatively modest incomes might be unable to take full advantage of the land tax deduction.
A proportionate deduction can be claimed against an investment property that is a holiday home or only generating income for part of the year. By comparison, anyone who is already paying land tax on investment property will be better off under the new arrangements.
Ms Giuseppi said some clients were very happy with the big reductions in land tax. Under the old rate, an investment property with land value of $450,000 would be liable for $2361 and under the new rate $1900. A property with a land value of $750,000 would attract land tax of $7461 under the old rate, but $5700 under the new one.
When renters and landlords get nervous
By Ellen Connolly
April 9, 2004Revolving door . . . Melissa Slee fears her apartment will become unaffordable and she will have to move if her landlord passes on the cost of the state’s land tax overhaul. Photo: Dallas Kilponen
Melissa Slee moved into an apartment two months ago, but fears her stay will be short.
She believes landlords will pass on the cost of state property tax increases to tenants, despite economists’ predictions that rents will not rise because of a glut of rental properties. The real estate industry disagrees with the economists. Either way, Ms Slee, 31, is stuck renting, as she is not in a position to take advantage of the new first home buyer incentives.
“That’s just not an option. I don’t have the money. I would have no way of raising money even for a deposit. It’s out of my league, so I’m forced to rent.”
In January, after a month of house-hunting, Ms Slee moved into a rental property, a two-bedroom apartment at Enmore.
“I am a bit nervous about this. I am at my limit now – $250 a week is as high as I can go. I just don’t want to be putting any more money towards rent. If it goes up, I’d have to think about moving out.”
Security is a priority, as are living close to work.
“I had to stretch my budget to afford a safe place, but if rents go up I don’t know if I’ll be able to stay in the area. I was saving money on transport, but if it makes it not worth my while, then I’ll have to move further out.”
One in the eye from Egan
ANALYSIS | By Brian Robins
April 9, 2004It’s not often that a state government manages to poke the Federal Government in the eye, but this is what NSW Treasurer Michael Egan has managed to achieve with this week’s property tax.
The stated reason for this week’s mini-budget was the slowdown in the property market, and the impact this is having on state revenues thanks to a decline in stamp duty from property sales.
Maybe.
However, the mini-budget comes as the Carr Government has stepped up its campaign against the misallocation of funds by the Grants Commission which are raised by the goods and services tax.
NSW contributes much more than it receives in return, effectively subsidising wealthy states such as Queensland and Western Australia.
Property taxes are loathed by investors although, overlooked in the reaction to this week’s mooted changes, is the fact that the property tax is a tax deduction for investors.
This means that the levy is paid to the Carr Government, but is then deducted from taxes paid to Canberra. In other words, Canberra will be funding the extra revenue stream that Macquarie Street will generate from this tax. And how much will the property tax raise? In a full year, $690 million.
“The majority of the proceeds will cover this year’s Howard/Costello cuts,” Mr Egan told Parliament on Tuesday, referring to the loss of state income from the latest Grants Commission changes.
“Dont be looking in your back yard for a four leaf clover when the opportunity of a lifetime could be knocking on your front door….”
interesting read, thanks for the info.
I know there appears to be panic for tenants, but lets face it there is panic for those investors now faced with this tax. Just because people are investors does not necessarily mean they are rich or can afford it either.
Wait til we see big mean baddie landlord raised the rents….they forget big mean nasty money grabbing politician had an input….
I remembers years ago learing to find a rock the right size and shape and skim the surface of the water, I saw the rock or pebble hit, jump and bounce into the air, to repeat the process until finally it fell to the bottom depths…we had competitions to see who could get their pebble to go furtherest…
My father used to take us kids to fishing spots, watering holes and the likes, as a little ‘un I was intrigued by the water, so still, so clear, so reflective, until i placed my hand or fingers quickly in the pond….and the water displaced, a ring formed, a ripple sent the water outward away from me and it seemed to keep going. I wondered how this happened and why?
We hear news like taxes on a regular basis, someone puts their finger in the pie, someone has the control and someone casues the effect, and as the info sinks in and reaches each of us, the ripple continues….did the originator realise what was really happening? and the effect ir really would have? And how many pebbles are going to sink….
” a blind man may see what a sighted man may not”
Hi Mysta, that certainly was a interesting series of opinions coming from all kind of directions.
Mind if I ask where (or how) you collected these ?
Thanks,
Pisces
Pisces, not sure where Mysta got these from, but in general, you can find every news article on the net written about the tax changes if you go to google.com and then to the “news” section and then type in “stamp duty NSW” or similar key words.
kay henry
Thank you Kay. Sometimes you are really lovely. [inlove]
Pisces
Originally posted by Pisces:Hi Mysta, that certainly was a interesting series of opinions coming from all kind of directions.
Mind if I ask where (or how) you collected these ?
Thanks,
Pisces
Why but the paper when you can save $2.00 and the environment all at the same time!
Cheers[biggrin]
“Dont be looking in your back yard for a four leaf clover when the opportunity of a lifetime could be knocking on your front door….”
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