How To Avoid Land Tax On Investment Property?

How To Avoid Land Tax On Investment Property?

Land Tax will invariably form part of every property investor’s journey at some stage or another.

Fortunately there are a number of strategies to help you minimise or avoid Land Tax on investment property.

If you’re just starting out on your property investment journey you may never of even heard of land tax before.

For those of you who own multiple properties in a single state you should have already felt the unexpected pain of land tax.

What is land tax?

Land tax is a tax levied on the owners of land each year.

Land tax applies to land regardless of whether income is earned from the land.

Who needs to pay land tax?

You may need to pay land tax if you own, or jointly own, any property in NSW, QLD, WA, SA, VIC, ACT or TAS that is not your principal place of residence, or other land exempt from the tax, as of midnight on the 31 December, where the total taxable value of your land is greater than the land tax threshold.

How can you minimise your land tax payments?

Basically every state and territory government in Australia (except the Northern Territory) imposes a land tax.

Land tax is based on the accumulative value of all unimproved land that you own, other than your principal place of residence in any particular state.

This means as you accumulate more property in one particular state the amount of land tax that you need to pay will also increase.

Example – courtesy of Your Investment Property Magazine:

You buy 4 houses with land total land value of $680,000:

  • $100,000
  • $150,000
  • $180,000
  • $250,000

Scenario 1: Invest in multiple states

Buying property in multiple states is one strategy to avoid paying land tax on investment property.

For example:

  • If all 4 of the properties in the example above were owned in NSW, you would of needed to pay $4,644 in land tax for a land tax threshold of $396,000 for the 2012 land tax year.
  • On the flip side if all 4 properties were purchased in different states you would not be eligible to pay land tax as you would be sitting below the land tax threshold in each state.

This strategy can also be an effective investment strategy as different markets fluctuate throughout different stages of the property cycle.

Scenario 2: Buy units instead of houses

Units will generally have a lower land to building ratio than houses. This is due to the relative size and value of the land in relation to the overall value of the property.

It’s important that you factor in the additional costs associated with holding a unit when running the numbers (strata fees + land tax).

Scenario 3: Buy properties in different entities

The final option using the example above is to buy each of the 4 properties above in a different entity.

For example:

Lets say Jack and Helen Scott owned the four properties in the example above. If Jack owned one, Helen owned one, they owned one together and the 4th property was owned under a trust there would be no land tax to pay, as each of these properties are owned by separate entities.

While this may seem too good to be true the costs of setting up and maintaining a trust might outweigh the benefits of reducing your land tax bill.

Note:

Its important to sit down with your Accountant to discuss your overall income and taxation position in relation to land tax as it too can play a role on which of the 3 strategies above you decide to move forward with.

What is the land tax threshold in each state (in 2015) and where can I get more information?

NSW

Land Tax Rate - NSW

QLD

Land Tax Rates - QLD

Land Tax Rates - QLD - Trusts

WA

Land Tax Rates - WA

VIC

Land Tax Rates - VIC

Land Tax Rates - VIC - Trusts

ACT

Land Tax Rates - ACT

TAS

Land Tax Rates - TAS

The information contained in this article is for general information purposes only and should not be regarded as a substitute for professional legal, financial or real estate advice. The information is provided by Pumped On Property and while we endeavour to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained in this article for any purpose. Because every persons needs and financial situations are different, the information in this article are intended as a guide only. Any reliance you place on such information is therefore strictly at your own risk.

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Ben Everingham

About

Ben founded Pumped On Property after building a multi-million dollar property portfolio over a 5 year period. His mission is to show you how to replace your income through property investing so you can do what you love…full time.

8 thoughts on “How To Avoid Land Tax On Investment Property?

  1. Looking to buy number 4 . On my way to replace my income of 120k . Hate my job . Needing to find undervalued properties that I can renovate . What is your fee , and can you find properties with discounts that are more than your fee!

    Cheers

    Brendon

  2. Loved the examples. I think only few people really think about owning properties under different entities. Or it could be that they don’t trust their partner enough to buy in their name 🙂 .

    1. Thanks Mark, I think own properties is an under utilised strategy.

      A lot of investors I speak with get worried about the costs of setting up and managing a trust structure, as you are aware these fees are insignificant when compare to the cost of land tax over time.

      Interesting point of view in regards to partners.

      1. I have to admit the different entity idea is one I have never thought of before. I’m a tax advisor and the only other issue with using trusts (aside from costs of setting up and ongoing compliance) is that losses are effectively trapped – meaning negative gearing wouldn’t work (though the aim is to find a cash flow positive if possible!). As well, I am not sure if banks are as happy to lend where there is a trust structure involved. In any event, fantastic article and love the website.

        1. Thanks Mary.

          I know of a large number of investors using this strategy.

          I agree the major issue is passing loses out of the trust.

          I have never seen a bank knock back a client for buying in a trust as long as the director/s of the trust can service the loans correctly in the first place.

  3. Hi ,
    I have read your article regarding “Scenario 3: Buy properties in different entities”. I am structured like you mentioned in your article thinking it is a good way to minimise Land Tax . Though in 2015 i received a letter from the ATO it mentioned that I had to back pay because I was assessed based on the total land value of all my interests in land that I owned , whether I own them individually or as a joint owner with different people.I did ring the ATO to dispute this and I asked them how long has this individual assessment been around ? They said for a very long time. I was shocked by this and for the amount of money I had to pay and back pay.I did ask them does this mean a married couple you have investment properties together have to land Tax individually ? they said no this is different because they are married.
    Have you heard of a person being assessed individually ?
    Thanks

  4. Hi Mark,
    That’s a great article, explaines it simply. I notice it’s 2009, any chance of an update as i think laws in Victoria have changed.

    thanks!

    Julie

  5. Hi Mark have been contacted by state Revenues Office in Victoria, that I have been paying tax on 2 – property which is not under a trust or owned by the trust , but my accountants have put them under the trust for tax purposes while o was working but have retired 8 years ago and all the other accountants have not done my tax as individuals. So they State I owe more money because the properties are owned by the trust , which they are not I have the original contracts i signed not trust . I am going to appeal as I had to notify them about the trust under the act ( which I don’t know the act and they didn’t tell us ) . Plus they stated that the tax officer had given them this information , it’s my private information where and who gave them this information

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