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I have recently got a letter asking if I need to pay Land Tax on my Australian property, what is this for?

In Australia the Federal Government is entitled to receive Income Tax and Capital Gains Tax and this is managed through an annual lodgement of a tax return.Under the Australian Constitution, State

In Australia the Federal Government is entitled to receive Income Tax and Capital Gains Tax and this is managed through an annual lodgement of a tax return.

Under the Australian Constitution, State Governments are not entitled to charge any taxation against income or capital receipts, however they are entitled to raise levies or duties on activity within their state.

One of the major levies for each state is Land Tax.

For many people living in Australia, they are unfamiliar with land tax as it is not charged on the family home in any of the States as it is usually only charged on vacant land, rental property or commercial property.

To qualify for the family home exemption you need to have been actually living in the property on the date of determination (different for each State) so it is very difficult to achieve this if you are living overseas.  Some states provide for the family home exemption even when abroad but will usually require that the property is not rented out during the period overseas.  If rent is collected then Land Tax is likely to occur if you own more than one rental property in the same State.

Each state has a different rate of Land Tax, usually based upon the unimproved value of the land of the property in a similar calculation to the annual local council rates.

You will usually find that there is a tax free threshold on offer that will mean that for anyone with just one property (over and above their family home) that they are under the tax level and have no Land tax liability.  This can prove advantageous if you have property in a number of different Australian States as you get a new threshold for each State of ownership.

In addition, the land tax on an apartment will be substantially less than that of a house as the unimproved land value is shared over the many owners and creates a lower individual value for tax purposes.

Land Tax is calculated on the cumulative value of all of the property owned by a person in the state of location so the more property you own the higher the rate of Land Tax and the cost can escalate sharply.

The annual cost can vary from a few hundred dollars to many thousands, and each State Revenue Department is quite active in seeking out non payers and recouping any Land Tax arrears. 

If you think you may have a potential Land Tax liability you will need to contact your property manager or the State Revenue office as soon as possible to confirm if you are over the relevant threshold for your State.  If they find you first the penalties can be quite expensive.

A Land Tax cost isn’t a deterrent to purchase, rather a nuisance.  It can however become expensive if you have built a substantial property portfolio in one state and needs to be considered when working out your cash flow on your rental property.

Knowing that Land Tax is due would not make me change my investment decision as any good house will grow sufficiently to justify the additional cost of Land tax, however it would certainly warrant a review of my investment strategy to allow for multi State property ownership and consideration of a sensible mix of houses and apartments to keep your taxable land value down.

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