Many property investors have seen a considerable increase in their Victorian land tax assessed this year, with some investors experiencing a 100% increase.
So what has happened?
The increase arises from two sources:
- A large increase in the value of land on which land tax is assessed. The revaluation of properties this year reflects a two yearly (now changed to annual) cycle. As this period covered a large increase in market values, it has resulted in a significant uplift in the value of land. Combine this with;
- Bracket creep. As land tax (like personal income tax) is assessed on a progressive tax scale, the increase in land value has pushed the marginal rate for many land tax payers up. This has caused an increase in the amount of tax that is higher than the increase in the value of the land.
So, despite property values coming down by an average of 15 % in the last 18 months, a majority of investors still have substantial increases in land tax – a bitter pill indeed.
With the top marginal rate of land tax in Victoria being [2.25%] of the land value, and rental yields on houses in particular usually being 2-4% of the property’s total value, land tax has a major impact on the resulting income yield to property investors.
So what can you do about the large increase in land tax?
- Investors are entitled to object to land tax assessments. This is most commonly done on the basis of objecting to the valuation. However, our discussions with valuers and industry experts consistently suggest that those who have considered this avenue have been advised that the valuations on which the assessments have been based are in fact justified. We also understand that the State Revenue Office will push back against any objection that will result in a long and a costly legal process, even if ultimately successful. So objecting to an assessment seems unlikely to be fruitful;
- Review the balance of rental yield versus capital growth in your portfolio. In general, capital growth is the most value-creating dimension of long-term property investing, but usually comes with low rental yield. Where cash flow is important, it may make sense to adjust a portfolio. For example, sell a house and buy an apartment or two in exchange;
- Consider diversifying your portfolio across multiple states. As land tax is applied at a state-level, investors can obtain the benefit of the lower thresholds in each state. Consequently, a portfolio diversified across multiple states is likely to have a lower land tax burden than a portfolio of the same size held in a single state;
- Investigate holding the ownership of the portfolio in a way that results in the properties not being consolidated for land tax purposes. For example, properties held separately by husband and wife are not consolidated. Likewise, properties held through trusts are not consolidated (but are charged at a higher base rate). However, the potential benefit of structuring to minimise land tax must be weighed against the administrative and the potential for increases in other taxes such as capital gains tax, which may result from holding the portfolio differently. Professional advice is required to properly assess the cost-benefit of considerations of this type;
- Consider changing the financing structure of your portfolio to generate more external cash flow. For example, one of our team members at LongView borrowed more money against their portfolio at 5% interest, invested it with a managed fund that delivered 12%, then used the difference to finance the extra land tax without having to sell a property and lose access to the long-term capital gain.
So if Land Tax is really hurting…
We are talking to many of our clients to help them decide what they can do about Land Tax increases, and what implications it may have for how they think about their property portfolio.
Feel free to call Cath Stubbings, one of LongView’s Property Investment Specialists, on 0411 101 999, and we can talk you and your financial advisers through your options. In the meantime, we are also looking into whether there are any options for collective action by a group of our clients acting together, so stay tuned.