Land tax is a cost of owning property that can creep up on property investors – usually when they start to buy more than one investment property. It can run into the hundreds (even the thousands) of $$ and what’s more – it’s an annual bill!
In this post, I will outline the ins and outs of land tax in Victoria, what a “site value” means, and strategies we’ve seen savvy property investors use to reduce their land tax bill.
What is land tax?
Land tax is applied to the value of land you own in a particular state. In Victoria, the tax is administered by the State Revenue Office (SRO).
Whilst both land tax and stamp duty are state taxes – land tax is a tax on owning land whilst stamp duty is a tax on buying real estate.
This means that whilst stamp duty is a one-off tax, if you are liable for land tax you will need to pay it every year for as long as you own the property.
It’s important to note that land tax only affects property investors. This is because your principal place of residence (in other words your home) is exempt from land tax in Victoria. Land used for primary production i.e. a farm, is also exempt from land tax.
You are only required to start paying land tax when the value of the land you own, known as the “site value”, is worth $250,000 or more. For example, if the house you live in has a site value of $500,000 but the value of the land on your investment property is only worth $200,000, then you will not need to pay land tax.
How is land tax calculated?
The current land tax rates in Victoria are on a sliding scale, ranging from 0.2% to 2.25% (for land worth $3 million or more). This rate is applied to the “site value” of the land you own.
Say you have one investment property in Victoria with a site value of $350,000 – this means you’ll pay land tax of $475 per year. If you then decided to buy another investment property in Victoria, also with a site value of $350,000, this means you now own $700,000 worth of taxable land.
Your land tax bill would suddenly increase to $1,475 per year – more than three times what you were paying before, even though the value of your land only doubled. This is because the higher the combined value of your land in a particular state, the higher the rate that applies to you. Whilst this is tax deductible, it’s still an extra cost that you have to pay.
In addition some situations attract a land tax surcharge for example where land is held through a trust or if you are considered to be an “absentee owner”.
How is site value worked out?
You’ll be pleased to know that the site value of your property is not the same thing as its selling price – it is usually much lower!
The site value is the unimproved value of the land, excluding buildings. This value is assessed by your council or the Valuer-General every two years before 1 January. You can find out your site value by checking your council rates notice.
If you’re unhappy with a land tax valuation and think it is too high, it is possible to object to the valuation through your local council or the SRO.
How to reduce land tax?
Knowing how land tax works can help you figure out if buying that additional investment property or development opportunity is really worthwhile or whether the additional land tax you pay will offset your returns. The SRO has a free Land Tax Calculator to help you work out how much land tax you would need to pay.
Here are some of the strategies successful property investors use to reduce land tax:
- Diversifying their investments across different states – this is because land tax is a state-based tax and each state will have its own thresholds. So for example, if you owned one investment property in Victoria with a site value of $200,000 and another in NSW with a value of $400,000, you would not need to pay land tax in either state (as the threshold in NSW is $482,000) – even though the combined value of $600,000 would exceed the land tax threshold in both states.
- Buying through different structures – investing indirectly in property may reduce land tax as it applies only to direct owners and thresholds are also worked out based on direct ownership.
- Buying apartments rather than houses – it will generally be the case that an apartment has less land value and therefore this will attract less land tax too. Though make sure you stay away from those high rising apartments in the CBD area.
- Ensuring their principal place of residence is correctly recorded – as your home is exempt from land tax you should always make sure those details are up to date with the SRO so you are not paying too much.
Property investors should of course always consult with their tax and other trusted advisors to work out if an investment strategy is right for them. Also, what may be good for reducing land tax may not be great for your investment goals.
Another part of meeting your investment goals is ensuring you have the right financing in place. Mortgage Corp specialises in helping successful professionals and property investors strategically structure their loans for long term investment success, request a Free Loan Structuring Strategy Session with our senior mortgage strategist Neil Carstairs today!
About Mortgage Corp
Based in Mount Waverley, Mortgage Corp specialises in helping successful professionals and property investors maximise their long term investment return with our strategic approach to loan serviceability, tax savings and financial freedom.
While most banks and brokers focus on merely getting you a loan, Mortgage Corp is committed to getting you a comprehensive investment result. Request a Free Loan Strategy Session with our senior mortgage strategist Neil Carstairs today!
About Neil Carstairs
Neil is the founder of Mortgage Corp, an active property investor and awarding winning MFAA accredited finance broker with more than 10 years’ mortgage broking experience. Currently, Neil is one of only 19 MFAA Certified Mentors in VIC/TAS region.
He is known for his strategic approach to investing and ability to reach fast, successful outcomes for clients where his industry peers could not. Connect with Neil on LinkedIn