Many property investors have seen big increases – some up to a doubling – in the Victorian land tax assessed this year compared to prior assessments. We are talking to many of our clients to help them decide what, if anything, they can do about that and what implications it may have for how they think about their property portfolio. We are also looking into whether there are any options for collective action by a group of our clients acting together – you’ll hear more on this shortly.
So what has happened ? The increases arise 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 cycle (now changed to annual) resulting in a significant uplift in the value as this period covered a large increase in market values; combined with
- Bracket creep. As land tax is assessed on a progressive tax scale (like personal income tax) the increase in land value has pushed the marginal rate for many land tax payers up causing an increase in the amount of tax higher than the increase in the value of the land.
So, despite property values coming down quite a bit (on average about 15 %) in the last 18 months, most of us 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 between 2 and 4% on the property total value, land tax has a major impact on the resulting income yield to property investors.
So what can you do about this large increase in tax?
Investors are entitled to object to land tax assessments. This is most commonly on the basis of objecting to the valuation. Our discussions with valuers and others suggest that almost invariably those who have considered this avenue have been advised that the valuations on which the assessments have been based are justified. We also understand that the State Revenue Office will push back against any objection resulting in a long time frame and a costly legal process even if ultimately successful. So objecting to an assessment seems generally unlikely to be fruitful.
At a more strategic level, there are a number of things property investors should consider when acquiring properties or considering the ownership structures for holding them.
- 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 it usually comes with low rental yield. Where cash flow is important, it may make sense to adjust a portfolio, for example to sell a house and buy an apartment or two in exchange. We conduct portfolio reviews for many of our multi-owning clients – call Cath Stubbings on 0411 101 999 to discuss;
- Considering diversifying the portfolio across multiple states. As land tax is applied at a State level, investors 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). The potential benefit of structuring to minimise land tax must be weighed against the administrative and 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 cash flow outside. One of our team at LongView actually borrowed more money against their portfolio at 5% interest, invested it with a managed fund that delivered 12% and so could use 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, feel free to call one of our Property Investment Specialists Cath Stubbings on 0411 101 999 and we can talk you through the options you, and your financial advisers, might want to consider. In the meantime, stay tuned while we investigate the options for potential collective action by our clients.