Legal Tip 28: Land Tax and Property Ownership

Land Tax and Property Ownership


Perhaps land tax is the most important thing to consider when deciding how to own the next property.


Get it wrong and it can cost you dearly. I had a client whose accountant suggested they use a discretionary trust in NSW to own property - he didn’t mention land tax at all and the clients are now stuck with paying $6,400 per year in land tax for every year they own the property. Imagine how this could delay the paying off the non deductible loan on the main residence.


Each state has different land tax rules so you can only plan the purchase once you know which state you will be purchasing in. Once you know that then ascertain the land value of the proposed property. Consider the effect of increasing land prices and how the land tax thresholds for that state change each year. Some states such as QLD have a threshold which doesn’t move. Other states such as NSW increase the threshold with the CPI each year. So a property with land value of $580k in QLD may not be over the $600k threshold this year, but could next year if it increases in value slightly.


Once you have done all this you can plan ownership so as to avoid or minimise the land tax rates. Keep in mind that land tax is not the only thing to consider but it must be tied in with the many other things to consider when deciding ownership - stamp duty, income tax, asset protection, control, death, incapacity, bankruptcy etc etc.

 

The accountants and lawyers who still suggest a DT, hybrid trust in many forms or a non-fixed unit trust astound me. There are still huge numbers of people with problem trusts that could fix the concern but blindly think it cant be fixed.

And all of them potential slam the door shut on a long term plan to use super one day to invest in property.

 

@Paul@PFI Could you please elaborate on why accountants and lawyers should not suggest using a discretionary trust to hold property?

 

Accountants shouldn't because this is legal advice. As a lawyer I do suggest discretionary trust, in certain situations.

 

A strange thing I discovered about land tax recently is that it is the combined property ownership of an individual which matters in relation to the threshold.

So if you own 2 properties in QLD and their combined land value is over $600,000 then you are liable for land tax on the overage. That could easily catch people out.

And another strange thing is that the tax bill for any given piece of land attaches to the land so if it is sold with unpaid land tax (due to combined value of seller's properties) and the buyer does not own a second property and so is not liable in their own right they still inherit the tax bill from the previous owner if this is not cleared prior to settlement.

 

That's why it is important for your solicitor to get a land tax clearance certificate prior to settlement and get this resolved.

 

I'm with Terry on this one. I can tell you why not use a DT but only from the tax perspective (eg neg gearing wont work, loss issues etc). But I cant tell when you should. Or address a number of other reasons which a lawyer is qualified to explain and understand. Thats legal advice.

Disc Trusts sound great for double dipping QLD land tax thresholds but there is more to a trust than this. A Disc Trust can never dispose of the property to the members SMSF and a SMSF can never be involved with a disc trust.

One of the more common problems I see with longer term property investors. They all later realise the tax benefits of super and realise their fund cant acquire an interest in any of their own property but its has the cash.