STOP!
Before you buy your property in a family trust, YOU MUST consider the land tax on property.
We’ve had a number of clients join us with a huge land tax bill
due to investing in the wrong property structure.
You could be paying $10,000s of dollars extra a year due to one slight easy mistake.
Do not confuse land tax with income tax or capital gains tax. It’s completely different.
Land Tax is taxed differently from federal tax, which is income tax or capital gains tax.
It’s actually taxed by the states of Australia, which means that there
are different types of taxes for land tax specifically for your state that you live in.
So what is land tax?
Land tax is a tax levied each year on the property you own that is above the land tax free threshold.
Land tax is generally payable on the unimproved value of the land that
investors own; and applies regardless of whether income is earned from the land.
The land’s unimproved value is the value of the land without taking into
account any improvements on the land such as buildings, landscaping, paths, and fences.
You’ll likely have to pay land tax if you own OR jointly own vacant land, including rural land,
and land where there’s a house built on it.
As investors, you’ll probably pay land tax on your investment property too.
Land tax is also levied on company title units, residential, commercial or industrial units,
commercial properties like factories, shops and warehouses,
and on land leased from the state or local government.
Okay, so if you fall into one of those categories, this video is for you. So please, stick around.
Let’s have a look at how land tax is calculated.
Land tax is calculated on the total value of all your taxable land
above the land tax threshold, not on each individual property.
For example, if you own two properties,
with the unimproved land value of each individual property amounting to $300,000 and $220,000,
then you’ll be liable to pay land tax on a total value of $520,000.
If the combined value of your land does not exceed the threshold, no land tax is payable.
Each state government website generally has an easy-to-use land tax calculator,
so make sure to check them out.
We’ve left a link in our bio that will take you to our land tax guide.
You can find all the government land tax links in the article.
The amount of land tax payable is dependent on whether it’s an individual paying land tax or
whether it's a company or a trust and the land tax free threshold of each state or territory.
For the purposes of this video, we are going to have a look at the state thresholds
for an individual paying land tax in New South Wales, Victoria and the Northern Territory.
In New South Wales, Land tax is calculated on the total value
of your land tax assessment above the threshold.
You can see from this table that the general land tax threshold for 2021 is $755,000,
and the premium land tax threshold is $4,616,000.
You’ll pay $100 in land tax PLUS 1.6% of the land value
above the threshold up to the premium threshold for the general properties.
For premium properties, you’ll pay a $60,164 in land tax
PLUS 2% of the land value above the premium threshold.
So if Kim bought an investment property in Sydney in 2020 for $1,400,000, she would pay $100
plus 1.6% of $645,000. Which is the difference between $1,400,000 - $755,000
which is the threshold. That would total to $10,420.
And if Leo purchased a holiday house in January 2021 in Byron Bay for $4,800,000,
he would pay $60,164 plus 2% of $184,000.
Which is the difference between $4,800,000 - $4,616,000. That would total $63,844.
These amounts would be payable after the 31st of December, but assessable on the 31st of December.
The land tax calculation is a little bit different in Victoria.
Instead of a set amount with an additional percentage for any value above the threshold,
the Victorian government calculates land tax according to the property’s taxable value.
If you have a look at this table, you’ll see that if your property cost you less than $250,000,
you won’t have to pay any land tax.
But if your property value is $600,000 to $1 million,
then you’ll pay $975 + 0.5% of the amount more than $600,000.
So if Emily purchases a three-bedroom investment property in Melbourne, and it cost her $795,000,
then she would have to pay 0.5% on $195,000 (the amount more than $600,000) PLUS $975.
On the 31st of December each year, Emily will have to pay a total of $1,950 in land tax.
If you live in the Northern Territory, you’re one of the lucky ones! The Northern Territory
is the only territory (or state) that doesn’t require property investors to pay land tax.
So make sure to check out our ultimate guide to land tax to
see the threshold amounts and the land tax payable rates
for other states and territories. The link is in my bio or you can probably check it out here.
Now, we’ve had a look at how land tax works for individual property owners,
but how does this work with companies and other types of organisations like a trust?
Well, a company is generally assessed in the same way as an individual.
However, some states and territories have certain specific requirements that others don’t.
For example, in NSW, Tasmania and Victoria, a company is assessed in
the same way as an individual unless it’s related to another company.
So, make sure that you visit the relevant state or
territory’s government website for the rates applicable to companies and related companies.
It works a bit differently with trusts. A trust is
an arrangement where a trustee manages or holds property for
the benefit of one or more individuals or organisations - known as the beneficiary.
When calculating your land tax liability,
you must consider the value of your interest in the account.
A trust may be liable for land tax. Make sure you visit the relevant state
or territory’s government website for the rates applicable to trusts.
You may be able to reduce the amount you pay by claiming the land tax
threshold, depending on the type of trust.
If you’re thinking of purchasing a property through your trust,
you must review the land tax rules of the state that you’re purchasing in.
For example, in NSW, special trusts,
such as family trusts, don’t have the land tax free threshold.
This means that you could be subject to a significant large land tax bill.
So, it’s worth investigating all your options and speaking to an expert.
If you’ve been advised or thinking of buying your property in a trust.
STOP and review the land tax implications first.
Let me give you an example of why.
Say you wanted to buy a $1m investment property in NSW. Land value is at $1m.
If you purchased this in your personal name you would get the land tax free threshold
of 755,000 and pay roughly about $4020 in land tax per year.
If you decided on the other hand to buy in a family trust. Then you
lose the land tax free threshold and you could pay $16,100 per year in land tax.
Just one slight mistake, it will cost you 4x in taxes per year.
So be very careful with buying property in family trust.
I am not saying family trusts are not good for property,
I just want you to be aware of the LAND TAX implications.
Okay, so now that you have an idea of how much land tax could cost you,
I’m sure you’re wondering if there are any exemptions that you can claim.
Depending on the land ownership and use, you may be eligible for a land tax exemption.
So for example, if the property on the land is your principal place of residence,
generally, it’s exempt in all the states and territories that require you to pay land tax.
In other words, you won’t have to pay land tax on your home that you live in.
However, if you own a property in a trust or a company,
you can’t claim this exemption, obviously.
Again, each state has its own rules for land tax exemptions. So, for the purposes of this video,
we will look at the exemptions for New South Wales and Victoria.
In New South Wales, you’ll be exempt from paying land
tax if the land is used for primary production, for example, dairy farms.
You also won’t have to pay land tax if the property is used as a boarding house
or if the property offers low-cost accommodation.
So caravan parks, non-profit organisations and retirement villages are also exempt from land tax.
And lastly, you won’t have to pay land tax if you run
a child care centre, aged care centre or nursing home on the land as well.
In Victoria, land tax exemptions relate to Crown land, and public land.
If the land is used by a non-profit organisation for sporting activities
and other outdoor activities, then you won’t be liable to pay land tax.
Other exemptions relate to health care centres, care facilities,
retirement villages, caravan parks, mines and agriculture farms as well, for Victoria.
Before I finish off, I wanted to just share four more tips
with you for reducing your land tax payable.
Number one, purchase the property in the name of a person
who has not already hit the threshold in a state.
A good example of this is when a couple decide to purchase investment properties.
For example, the husband might already have a property in his name, hitting the threshold.
Therefore, he might consider acquiring any more properties in his wife’s name rather than his.
Number two used fixed trusts and other entities to split up the threshold.
The use of a trust can allow you to essentially have multiple thresholds.
However, before you invest, make sure to chat
to a tax agent to find out the tax situation surrounding the property.
Number three, invest in more than one estate.
Don’t put all your eggs in one basket - spread out your properties across different states.
You’ll accumulate less land tax because you’ve spread the value of the land
or property across several different thresholds.
And lastly, buy properties with lower land values.
Generally speaking, apartments tend to have a lower landmass compared to houses.
It could be that you can own a few apartments before ever getting
near that threshold for that state.
Make sure to chat to a tax agent about land tax. You don’t want to get a nasty
surprise when it comes to taxes - especially if there are ways you could have reduced it.
If you’re interested to learn more about tax deductions and any other tax-related content,
head over to our YouTube channel and click subscribe.
See you next time!