Article by Peter O’Malley
The 2019 land tax notices were recently delivered to the chagrin of some landlords. Examples of landlords being issued $50,000, $60,000 even $70,000 land tax bills was fairly common during February.
One landlord, a self-funded retiree, who has fought hard to buy 5 properties over his working life, was hit with a $68,500 land tax bill on income of $150,000. Some people would deem/debate this gentleman is rich – let’s just agree he is not poor. From the $150,000 he earns from his investment properties, he pays out council rates x 5, maintenance x 5, income tax on $150,000, letting fees on vacancy, management fees x 5 and now a whopping $68,500 land tax bill.
In such a situation, you can claim the landlord is very fortunate to have accumulated such assets. The reality is, he and many others are being severely punished with crazy land tax bills for being structured incorrectly, rather than a rebalancing of wealth across society.
Our example landlord is a long-term buy and hold investor who bought and accumulated real estate
in order to be self-funded in retirement from the income generated. The property boom of 2012-2017 saw property values sky rocket whilst rents actually declined over the same period. As a percentage of income generated, land tax bills are crippling the buy and hold property investor in NSW.
Many landlords have been forced to sell in order to pay and/or avoid future land tax bills. The problem with this strategy is the landlord is inadvertently pushed into a capital gains tax scenario. A scenario emerges where patient long term landlords pay a tax (CGT) as they attempt to avoid an unfairly applied tax (land tax).
No other investment/asset class has taxation applied so disproportionately and unfairly as land tax is to the property investor. Land tax punishes low-risk conservative investors who stick to what they know – property. Furthermore, many landlords inexplicably received increased land tax notices even though the property market has been falling for the past 18 months. A cynic may suggest or feel it is a crude attempt to compensate for the stamp duty short fall.
Most of us accept taxes as a necessity for a functioning society. Part of the acceptance is the tax we pay is largely on profits (everyone is winning) or consumption (you pay tax in direct proportion to what you spend).
For too long land tax has been viewed as a tax on the rich. Maybe that argument has previously had some merit – either way it does not hold true in the current environment – a burden of the boom you may say.
Land tax is implemented in a clumsy blunt fashion. Instances whereby overstretched investors are forced to sell, for a capital loss, to avoid a land tax bill they cannot afford to pay are unfortunately common. There is no provision for land tax relief for those that fall into this category given the lack of synchronicity between state and federal taxes.
Land Tax Assessment
Rates and thresholds – Land tax is calculated on the total value of all your taxable land above the land tax threshold. The threshold for the land value changes each year and is applied as follows…
- General threshold: $100 plus 1.6% of land value above the threshold, up to the premium threshold.
- Premium threshold: 2% of land value above the threshold.
- The threshold is published by the Valuer General in October each year and applied to land holdings on 31 December each year.
- Land tax is applied for the full year following the taxing date of 31 December and no pro-rata calculation applies.
- The general threshold in 2019 is $692,000 and the premium threshold is $4,231,000
- You pay tax based on the combined value of all taxable land you own, not on each individual property. If the combined value of your land does not exceed the threshold, no land tax is payable.
- If the value is above the land tax threshold, you will only need to pay tax for the amount over the threshold, plus a base tax of $100.
How land is valued for land tax – The Valuer General determines the value of all land in NSW annually.
- Values are determined as at 1 July for the upcoming land tax year.
- The value is based on the average value from the current year and the past two years.
- Where the parcel of land was created less than three years ago (e.g. via subdivision or amalgamation) the Valuer General only takes into account the years after it was created.
- If you are a foreign person who owns residential land in NSW, you must pay a land tax surcharge.
Minimising Land Tax
The absolute key to avoiding and/or minimising land tax is the correct structure. Knowing how the tax works helps you devise the correct strategy (run all proposed strategies past your accountant BEFORE you buy an investment property).
The primary residence is exempt from land tax calculations, so always aim to live in the most expensive property. Apartments still have a land tax obligation, albeit at a much lower amount than a house given the respective land is shared amongst multiple owners.
Land tax is state tax so buying interstate investment properties alleviates the burden. Each entity (other than trusts) enjoys their own threshold for land tax purposes. Some properties may be in your personal name and some in company names and/or other family members names (you may accidentally wipe a child’s claim to the first home owners grant if you are not careful).
There are other options available that can be explored. Retrospective planning is less desirable and successful, than planning intelligently in advance.
Many sellers have made the mistake of renovating a kitchen or bathroom in the wrong place or style or standard. Buyers then feel as though they are paying for a feature that needs to be replaced. This in turn causes the buyer to decline the property altogether or make a lower offer to compensate for the replacement works. This potentially makes the renovations a total write off.
A common example is when the bathroom at the back of the house is renovated. Buyer preference is for open plan at the rear of the property. If you renovate a bathroom at the rear of the property, the brand new bathroom can be a major turn-off to buyers.
In this instance, the buyers would have been more interested if the original un-renovated bathroom was in place and the sale price was lower by the same cost as the new bathroom. Then the buyer does not feel as though they are paying for a misplaced bathroom.
It pays to speak with a few people for ideas on what works are prudent and necessary before going on the market. Interior decorators, stylists and estate agents can all offer valuable insights on what will benefit the sale and what won’t. Just remember, increasing the sale price does not mean increasing the profit.
When to Spend
There are many times and situations where spending money on a property can create a profitable outcome for the sellers. The main reason being that buyers tend to overestimate the true costs of works and renovations. A buyer is likely to subtract $20,000 in their mind for works that could costs as little as $5000.
At the very least, always put a property on the market in the neatest, cleanest and maintained condition that you can. It is common for investment properties to be sold in less than ideal condition. Buyers simply overestimate the cost of getting the property up to standard, potentially leaving the seller out of pocket.
For a reasonable amount, a good handyman can do wonders for your property prior to the sale campaign
Also be wary of blind works. If a buyer cannot see the issues a building inspector raises, they are likely to overestimate the true costs.
During the crucial negotiations stages, buyers are particularly nervous around roof issues, sub-floor issues and access, rising damp, termite risk and plumbing. The building inspector is being paid by the purchaser for a report on these areas of the property. They are blind areas that a purchaser is unlikely to access, relying on the inspector’s report instead. If the report comes back negatively, it can hamper the seller’s negotiation position. It is usually better to address issues upfront than get walloped during negotiations on something that is simple to fix.
There is no great science in working out what works are worthwhile before going on the market. Take your time and let common sense guide you with a good sprinkling of opinion from trusted advisers