Don’t Forget to Consider Land Tax When Purchasing A Property!
When purchasing a rental property many prospective investors are likely to budget for things like mortgage repayments, strata fees, council rates and property agent fees. However, it is important that land tax is also considered in the budget because if you own land exceeding the land tax threshold ($406,000 in 2013 and $412,000 in 2014, excluding your primary place of residence), then land tax will be payable.
What is Land Tax?
Land tax is imposed separately by all states and territories in Australia except for the Northern Territory. This article relates to the law as it applies in NSW.
Land tax is an annual tax imposed on the total land value of all taxable land owned in NSW. The land tax year runs from 1 January to 31 December. You are assessed on all land held at midnight on 31 December of the previous year. For example, if you purchase your rental property on 2 January 2013, you will not be assessed for land tax in the 2013 year as you did not own the property at 31 December 2012. Similarly, if you sell your rental property on 2 January 2013, you will be assessed for land tax for the full 2013 year even though you only owned it for two days! So the moral of the story here if you want to save on land tax is to sell before 31 December and buy after 31 December! Unlike some of the other government charges, you cannot prorate land tax for part year ownership. Of course though, you may be able to take this into account when you negotiate the sale price for the property.
Land Tax Clearance Certificate
Ensure that the solicitor or conveyancer helping you with purchasing the property obtains a land tax clearance certificate for you. A clear land tax certificate protects a purchaser from any unpaid land tax outstanding on the property, so a purchaser cannot be made to pay a prior land tax liability due on the property.
Land Tax Threshold
Land tax is only applicable if the combined value of all the taxable land you own exceeds the land tax threshold, which is $406,000 in 2013 and $412,000 in 2014. Your primary place of residence is not subject to land tax and therefore not included in determining your taxable land value. Please note that the primary place of residence exemption is only available for one property per family.
The land tax rates are the same for individuals, companies (unless the company is related to another company) and complying superannuation funds. However a company cannot obtain the primary place of residence exemption.
A trust that is a special trust cannot obtain the tax free threshold. Examples of special trusts include most family trusts, discretionary trusts, some unit trusts and some trusts created by will.
Land Tax Rates
Your taxable land value is not the same as what you paid for the property. The taxable land value is the aggregated unimproved value of all the taxable land you own, as determined by the Valuer General at 1 July preceding each land tax year.
The land tax rates for individuals, companies and complying superannuation funds for 2014 is as follows:
|Aggregated Land Value||Land Tax Rate|
|$412,000 to $2,519,000||$100 plus 1.6% of excess exceeding $412,000|
|> $2,519,000||$33,316 plus 2% of excess exceeding $2,519,000|
As mentioned previously, special trusts are not entitled to the tax free threshold. Instead, land tax will be charged at a flat rate of 1.6% of the taxable land value up to $2,519,000 and then at 2% thereafter.
You will need to advise the Office of State Revenue (“OSR”) if you are buying or selling property. If it is the first year that you will be liable for land tax, you will need to register with the OSR by 31 March of that year.