Comparison of the land tax cost of similar sized portfolios structured differently shows how expensive this can be
On the one hand let’s take a single property owner with a $5m portfolio of 80% land content all based in Victoria. The annual land tax bill would currently be $47,475 – almost 1% per annum of portfolio value.
On the other hand let’s take a portfolio of the same size and land content diversify it equally across Victoria, New South Wales and Queensland and split the ownership between two people. The annual land tax bill is reduced by almost 90% to $4,949.98!
Clearly careful attention to land tax can have a significant impact. The time to get this right is the time of purchase as the cost of changing property holdings (land conveyance duties, estate agent fees, marketing costs, legal fees, etc.) is high even before any capital gains tax which might crystallise on a sale is factored into considerations.
How is Land Tax determined?
The amount of land tax payable by a property owner depends upon:
- Who owns the property
- Land tax is calculated based on ownership and is levied on a progressive scale. Higher rates apply to trust ownership than individuals
- What other properties in the same jurisdiction that owner owns
- Land tax is calculated aggregating proportionate interests of the owner. So aggregating multiple properties in a jurisdiction can push an owner up the rate bands of the progressive scale
- Where the owner lives
- Land tax is charged at a higher rate to absentee/non-resident owners
- What use the property is put to
- A principal private residence is exempt from land tax
- Where the property is located
- The thresholds and rates of tax differ between states. Holdings are not aggregated for a single owner across different geographies
- The land content of the value of the property
- Land tax is calculated on the land value of the property holding not the total value. So houses will typically attract higher land tax than a similarly value portfolio of apartments.
How is Land Tax calculated?
The amount of land tax paid is calculated on a progressive scale at rates in Victoria of up to 2.25% as set out in the table below
With gross yields on residential property often in the vicinity of 3% land tax is a very significant part of the income yield of a property portfolio of an owner. For example, if a property is held as part of a large portfolio with a land value of in excess of $3m, a gross rental yield of 3.0% and the land content is 50% of the value of the relevant property then the land tax on that property would consume over 40% of the gross rental yield!
How can I reduce my Land Tax?
Consider diversifying holdings across jurisdictions – land holdings are not consolidated across jurisdictions. Consequently the land tax payable on a portfolio covering say Victoria and Queensland is less than a portfolio with the same land content covering just Victoria.
Consider the ownership structure of the portfolio – holdings are not consolidated between individual owners to calculate land tax. Consequently it can be beneficial for example for a couple to each have an interest in the portfolio rather than a single person holding them.
We note that ownership structure also influences income tax and capital gains tax positions and so should not be considered from the sole perspective of the impact on land tax.
Change mix of property holdings
As land tax is charged on the land content of the value not the total value of the property holding changing the mix of holdings to one containing lower land content – apartments rather than houses for example will impact the land tax.
Factors which affect land tax cost also impact on other costs and benefits of ownership
As many of the factors which impact on Land Tax also impact on a range of other costs and benefits arising from a property portfolio including:
- The yield and capital growth characteristics of the portfolio
- The income and capital gains tax consequences arising during holding and on sales of some or all of the portfolio
Consequently a multi-factorial approach to these considerations not one solely focussed on the land tax considerations should be taken.