The best way for property investors to avoid paying land tax: Ed Chan

Land tax is a state-based tax, meaning it gets charged by the individual states; therefore the rules, conditions and land tax thresholds differ from state to state.

Generally the first property bought in most states will be below their land tax threshold, such as an apartment (unless it’s a really expensive property), and subsequent properties bought in the state will be added to the first for assessment purposes. Generally by the second or third property the total land value will be pushed above that Sstate’s land tax threshold.

To eliminate paying land tax completely one could simply buy a single property where the land value is below the threshold and the second in another state and so on, which means you start fresh with a new land tax threshold in each state. 

So, effectively you could have eight properties without paying land tax.

However having said that, it's not a wise investment principle to invest solely for tax reasons. Tax reasons should never drive your investment principles.

It should be part of the consideration, but never the only consideration as there other key factors to take into account.

For example, it may be land tax effective to invest in a particular state, but that state could be at the peak of its property cycle, which makes that a poor investment.

To get an estimate of what the land value is one can look at the Valuer-General notices attached to council rates.

Land tax is self-assessed. In most states you will not receive a land tax notice from the Office of State Revenue reminding you of your obligations, and it's up to you to voluntarily self assess and lodge a land tax return.

What happens if you don't lodge a land tax return?

Well, no one will know in most of the states; however if you are unlucky you may get found out in a random audit and or when you decide to sell the property the buyer will want land tax clearance before taking possession of the property because land tax liability is transferred with the sale of the property.

In that case you will need to back pay all the land tax owed plus penalties and interest. This could be quite significant.

So it's always best to lodge a land tax return, even if you are below the land tax threshold. Lodging a land tax return gets you registered in the system and you will receive a nil assessment notice each year which will avoid the situation where you were unaware that your land value one year had climbed above the land tax threshold and you were liable to pay land tax; the non payment attracts penalties, fines and interest.

Ed Chan is a founding partner of Chan & Naylor accountants and a leading property tax specialist. He has co-authored three best-selling books as a seasoned property investor who understands the relationship between property investment and tax.