Mitigating the effect of land tax on your property assets and cash flow

GUEST OBSERVATION

Many property investors see land tax as an unavoidable evil, hard to get around and often simply the ‘price of doing business’ in this area.

But there are some ways to mitigate the effects of land tax on your property asset and cash flow. The best option depends on how you’ve structured your investments and planned your investing.

How it works

Land tax is levied annually on the value of your unimproved land holdings, determined as at 31 December each year. General exemptions exist in many States, such as the exemption for your primary place of residence or for land used for primary production. But vacant land, holiday homes and investment properties can all incur land tax liabilities.

Land tax is charged as a percentage of the total taxable land holdings value on a calendar year basis. Some States have a flat rate and others have a sliding scale. Most have a ‘tax free threshold’ so land tax isn’t payable until your land value exceeds the threshold. Some States also charge a different rate of land tax to trusts compared to individuals.

Who pays it?

As an individual, you are eligible to pay land tax in Victoria if your land holdings have a total taxable value of $250,000 or more. The taxable value of land is the site value provided by the relevant municipal council and can be found on your council rates notice.

Many people use trusts for asset protection and estate planning purposes. In Victoria trusts must pay a surcharge (subject to various exclusions) on top of the general rates of land tax.

It’s worth noting that some trusts - such as charitable trusts can be exempt from the land-tax surcharge. A Principal Place of Residence (PPR) Nomination may also exclude a trust from the surcharge if the trust’s beneficiary is using a residence owned by a trust as their family home.

It is important to remember that the taxpayer must notify the State Revenue Office if circumstances change. For example; if your principal place of residence is rented out for more than six months in a calendar year and you don’t notify the State Revenue Office you can face significant penalties.

When you begin to invest in property, land tax may not be a material consideration, but as additional properties are acquired the annual land tax assessment can become substantial. So what can you do to minimise your land tax obligations?

Invest in different states

Land tax is a State based tax - holdings in one State are not aggregated with holdings in another. Each State has its own land tax regime, with most States offering investors a tax-free land tax threshold. Consequently, investors may be able to own an investment property in each State before incurring a land tax liability. Concentrating your investment properties in one State means you cannot take advantage of the land-tax threshold available in other States.

Invest in different names

Holding all your investment properties in one name can result in substantial land tax assessments. Each individual has a tax-free threshold, so spreading ownership will often reduce land tax. For example, you may own one property, your spouse another, with a third property held in joint names or owned by a trust.

 If you own property jointly, remember that each owner is equally liable for the land tax assessed on any jointly owned land. An assessment will be issued to one of the joint owners on behalf of all owners.

If you hold additional land to that held jointly you will be separately assessed on your total land holdings, including your share of the jointly owned land. You will reduce your land tax liabilities for the tax already paid.

If investing in different corporations, it is important to remember that grouping provisions can deem related entities to be grouped if the management and control of the entities are the same. This will result in the taxable land values being aggregated for land tax calculations, rather than each corporation having its’ own tax free threshold.

Invest in Units/Apartments

As land tax is only based on the value of the land, there can be cash flow advantages to buying property with a very small land component. However, if you decide to invest in a unit or apartment, remember that the annual body corporate fees can often exceed your land tax liability. Further consideration needs to be given to the appreciation of the land value as opposed to short-term cash flow savings.

These are all useful ideas to consider when talking to your financial advisor or accountant about how to make your property investment as effective as possible. Remember, too, that while minimising land tax can have immediate cash-flow advantages, any land or property acquisitions should be made as part of a balanced, long-term and diversified investment strategy.

Danielle Canterford is an accountant Marin Accountants, a firm specialising in advice for individuals, investors and family businesses.

You can contact Danielle via email or call (03) 9645 9229.