24 Oct Land tax explained – Ed Chan
Ed Chan from Chan & Naylor stumps up to answer some questions about land tax from Charlotte.
Kevin: Thank you for your questions. Keep them coming in the time; they’re very, very welcome, of course. Just do it through the website. Go to RealEstateTalk.com.au. There’s an “Ask Our Experts” question panel in there. Just put your question in.
We got one from Charlotte in New South Wales, and I’m going to defer in a moment to Ed Chan from Chan & Naylor to answer this one. Thank you for your question, Charlotte. Charlotte has a few questions on how tax is calculated. Don’t we all, Charlotte? “How much do I have to pay? Do I have to pay land tax on my principal place of residence, and should I take this into account when I buy an investment property?”
Ed Chan joins me from Chan & Naylor.
Good morning, Ed. Nice to have you on the show, too.
Ed: Thanks, Kevin. Nice to be here.
Kevin: Let’s answer Charlotte’s questions. There are a number of questions in there. What do you want to tackle first?
Ed: Probably the question around land tax is a good one.
Kevin: It varies from state to state, doesn’t it, Ed?
Ed: Yes, it does. You can go into the Office of State Revenue’s website for each of the states, and you’ll have all of the different rules and the rates and so forth. But generally speaking, the home that you live in is exempt, so you don’t have to pay any land tax on that. However, if you rented that home out and put a tenant in it, then it becomes subject to land tax, so you have to be careful when you rent it out. Some people think that they’re living in their home, they rent it out, and it’s still exempt from land tax.
Some people also confuse the exemption from capital gains tax, which is a six-year exemption. If you moved out of your house and rented it out and then you moved back in, it’s still exempt from capital gains tax but it’s not exempt from land tax. As soon as you rent it out, it’s then subject to land tax.
Kevin: How much time do you have in-between having it as your principal place of residence and then when you decide to put a tenant in there, how much time do you have to let them know that that’s the case?
Ed: It’s immediate. As soon as a tenant moves in, it’s then subject to land tax immediately. It’s all based on self-assessment, so you have to volunteer it. In other words, you have to fill in an application form. You can download that from the Office of State Revenue.
Kevin: I imagine if you don’t do that, you’re going to be in for a fine as well if they catch up with you.
Ed: Yes. Because it’s self-assessment, people think that “I’ll just get away with it and not pay it,” but you get caught when they do an audit. They do audits every now and then and they send questions that you have to answer.
But also, when you try to sell your house, the purchaser generally wants a land tax clearance because unlike other taxes, land tax goes with the property. If I bought a house and there’s land tax owing on it, then I take responsibility for that outstanding land tax liability.
Kevin: Wow. I imagine that’s a search the solicitor would have to do prior to settlement. Wouldn’t that be the case?
Ed: Yes, that’s the general way to do it. You get your solicitor or your conveyancer and they generally should ask for a land tax clearance on the land as part of their job, their due diligence, if you like. It’s important when you’re doing this that they do that for you, otherwise you could potentially inherit a large land tax liability.
Kevin: I suppose as the portfolio grows, too, it’s a good idea to search around to other states to spread that land tax liability around a bit.
Ed: Yes, that’s the other issue. Land tax is calculated at a particular point in time, but then once you’ve reached a threshold… And each state has a different threshold, and I won’t cover all of the states, but just generally, for example, in New South Wales, it’s around $482,000 in land value – that’s the unimproved value of the land. So it doesn’t include the property or the building that’s on there. The Valuer General will generally provide an estimate of the unimproved value of the land. That’s $485,000 in New South Wales.
In Queensland, for example, it’s $600,000 before you need to pay any land tax. In Victoria, it’s around $250,000 before you need to pay land tax. Again, it’s all in their website, so you can go in there and check it out for yourself.
Kevin: It doesn’t adjust to each year, either. As values go up, land tax is not adjusted every year, so there’s almost a bit of a creep-in there, isn’t there?
Ed: Yes, there is, although it depends on the state. A lot of the states don’t do it every year, so it could be several years before they bump the value up. When they bump the value up, they adjust the land tax.
One important point I’d better make is that when you buy a property, it’s all based on self-assessment, so they won’t automatically send you a bill for your land tax. It’s on a volunteer basis. It’s called self-assessment, not volunteer. Self-assessment is probably a better term.
You go into their site and you fill out a form. It’s an initial return. You send that initial return into the Office of State Revenue. They then assess the land, and if you’re under the threshold, they’ll send you a new assessment. If it’s over, they’ll calculate it and they’ll then send you a bill.
However, once you’ve done that, generally, in most estates, they’ll send it to you every year, so you won’t have to worry about it. It’s the first one that you have to really worry about.
Kevin: Ed, great talking to you. Thank you very much. You’ve answered all of those questions. Charlotte, the last part of your question, you said, “Should you take it into account when you buy an investment property?” Of course, you should; I think anyone would advise you of that.
Ed Chan has been my guest from Chan & Naylor. Ed, thanks for your time.
Ed: Thanks, Kevin, and thanks for your question, Charlotte.