What Is Land Tax?
What is land tax? Land tax is a tax you pay based on the value of your land in a given state.
Land tax is a tax that you pay based on the value of your land in any given state. Hey, I’m Ryan from onproperty.com.au and in this episode, I’m going to be talking about what is land tax and how does it affect you as an investor? Land tax is something that you need to be aware of as you accumulate more and more properties. Because it can become quite expensive if you don’t prepare yourself for it properly.
So land tax, as I mentioned before, it’s a tax that you pay based on the value of your land in any given state. Land tax is a tax that’s generally a percentage of the value of land that you own that you need to pay every single year. It’s charged in all states, except Northern Territory, and each state assesses land tax based on the value of land that you own within that state. So we’re going to go through and explain land tax in a bit more detail. We’re going to talk about some of the exemptions, how it’s going to affect you as an investor, some ways that you can avoid it and then future potential changes to the land tax that are out there.
The first thing that you need to be aware of when it comes to land tax is that there’s thresholds that you need to hit in any given state before you start getting charged land tax. Now, every state assesses and charges land tax differently. So, for example, in New South Wales, the threshold at the moment as I record this is $482,000. In Queensland, it’s $600,000. In South Australia, it’s $323,001 is how much the threshold is. So, each state varies in terms of its threshold, so you need to research each state individually or talk to your accountant about this stuff.
So what happens is basically, you don’t pay land tax until the value of your land reaches that threshold. And once the value of your land reaches that threshold, you are then charged land tax. It’s important to know that land tax isn’t the value of your property as a whole. It’s the value of the land that you own. So, for example, if you are a part of a unit complex, then you will only own a percentage of that land. So, only a percentage of the land’s value will count and the value of the unit itself won’t count. If you own a house, it’s only the land they’re looking at, it’s not the land plus the dwelling that’s on the land, so that’s very important.
When it comes to assessing land value, it’s done by the government or by parties that the government hire to do it. So, for example, in Queensland, the assessment is done by the Department of Natural Resources and Mines. Basically, from what I can gather, the government does the assessments or pay someone to do the assessments for them. They then tell you how much your land is worth and your land tax calculations are done on top of that. There are ways that you can dispute it and try and get it changed if you need to. So, the assessment, it’s not based on what you purchase your property for, what the real estate agent says it’s worth, but it’s what the government says the land is worth – that’s a very important thing to note.
Also, there are a lot of different exceptions as well to paying land tax. For example, in most – if not all – cases, your principal place of residence is exempt from the land tax payment and from the threshold, so it doesn’t add to the value of the land that accumulates towards paying land taxes. There’s a whole bunch of different other exemptions based on the type of land – whether it’s commercial or personal, etcetera, etcetera. So, you need to consult each individual state on what those exemptions are and whether you fit into them. So, for example, there’s different thresholds if you’re a personal investor versus if it’s for commercial use and stuff like that. And there’s exemptions for things like caravan parks and all of that sort of stuff.
Let’s quickly have a look at the thresholds and the charges and how land tax might affect you as an investor. And so, I did some research and looked at just a couple of different states to give you guys an idea. So in New South Wales, the threshold was $482,000 and once you’ve reached that threshold, you have to pay… Okay, before I say this, basically, in New South Wales, they assess the value of your land – the amount of land that you hold on the 31st of December at midnight each in every year. And so, they assess it at that date, at that time and that’s how they calculate how much land you own and the value. So $100 once you reach the threshold, plus 1.6% of every dollar up until $2.947 million.
And then after you go over $2.947 million, you’re paying $39,540 and then 2% for every dollar over that. So, land tax can be quite a significant amount. So you can see that’s 1.6% for everything between $482,000 and $2.947 million. 1.6% can be quite a lot if you have to pay that every single year. And then, everything over that, you’re looking at 2%.
In Queensland, you’ve got a threshold of $600,000. In which case, you pay $500 plus 1% up to $1 million. From $1 million plus, you pay $4,500 plus 1.65% up to $3 million and it goes on from there. So, you can see that, again, it’s quite similar, around the 1.6% mark or a bit less in Queensland. South Australia was even moreso than that. They have I think a lot of different thresholds.
It was like 0.5% up until $593,000. Then it went to 1.65% then it went to 3.7% for everything over $1,078,000. So, for every dollar of land value that you own over $1.078 million, you’re paying 3.7% of that every single year. Now, consider you’re getting a 3.7% rental yield, that basically takes that away. And so, land tax can be quite significant. It’s quite a lot of money. And so, it can quite significantly affect your cash flow if you’re not careful.
And so, it’s very important to know at this point that as I discuss each state assesses land differently. But that means that properties that you own in other states aren’t added to the land tax of a different state. And so, to avoid land tax, what a lot of people do is they spread their purchases out across different states. So they might purchase some in New South Wales, some in Victoria, some in Queensland, etcetera. So they’re not accumulating all of their land value within one state.
This allows you to grow your investment portfolio more and avoid land tax for longer by spreading across different states. So that’s something that people do to avoid land tax. Also, investing in units is something people can do to avoid land tax because you own a smaller percentage of the land. There’s less value towards land tax. If you own a house on a parcel of land, 100% of that is going to go to land tax unless you have exemptions. If you own a unit, then you only actually own a percentage of the land that unit’s on. And so, only a percentage of the value of that land goes towards your land tax value.
So if people invest in units, there’s also people avoid land tax by purchasing properties using different entities. So purchasing in different names, purchasing in trust and things like that. I haven’t looked in to that in great detail. So if that’s something that you’re interested in, then I would definitely suggest talk to an accountant, talking to a solicitor and things like that about setting up these entities and stuff like that. But from what I’ve seen, setting up trust funds and things like that, they cost money each year to run and to make sure that everything is going fine. And so, if you’re using that just to avoid land tax, the risk-reward might not be there. But, obviously, there’s other benefits to investing using trust and stuff like that as well. They’re the 3 ways that I know of that people avoid land tax.
There has been some talk about future potential changes to land tax and basically having a general land tax that people pay as a way to remove stamp duty from the purchasing process. So stamp duty is a fee that you pay when you purchase property. Obviously, it’s quite a great deal of money. It hinders the purchase and sale of property because people have to pay stamp duty, which is quite expensive.
It’s an irregular source income from the government because they don’t know how many properties are going to be sold that year and how much stamp duty they’ll get. And so, if they can change that to just charging everyone land tax and they will then have a more consistent income. So there are talks of potentially changing land tax. Maybe making it a national thing. Maybe just adjusting it per state. Maybe charging people who own their own home as well – their principal place of residence. Charging land tax on that so that they can get rid of stamp duty. So there are some discussions that are going on. Things that may be happening in the future in regard to land tax, but I don’t know exactly what the figures will be and stuff like that.
So I hope that this has helped explain to you what exactly is land tax. So it’s a tax that you pay as a percentage of the value of the land that you own in any given state. For example, we looked at New South Wales. Once you reach the threshold of $482,000, it was $100 plus 1.6% of every dollar of land that you own per year up to $2.947 million and then it changes to 2% after that. So it’s based on how much land you own. It’s a percentage of the value.
Something that is charged to you each and every year and something that you need to be aware of as an investor because if you start hitting this threshold, then you need to take into account that each year, I’m going to have to be paying X% of the value of my land towards tax and that can really affect your return on investment. It can really affect your cash flow. And so, you may want to consider some of the ways to avoid land tax legally, of course, by potentially purchasing in different states, using different entities or purchasing units as well.
I hope that this has been helpful. I’m Ryan from onproperty.com.au. If you want help finding properties all over Australia that have good rental yields, positive cash flow properties, with a high percentage that they’ll be positive cash flow anyway, head over to onproperty.com.au/membership and you can see my service over there where I go out, I find high rental yield properties and I share them with my members. So if that’s something that you’re looking for, if that’s something that you’re interested in, go to onproperty.com.au/membership and sign up today. Otherwise, I wish you the absolute best in your property investment journey. And until next time, stay positive.