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Rising land tax to cause havoc

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key takeaways

Key takeaways

State governments have been sending out land tax notices to property investors recently.

The increased levies are prompting them to reassess their investments.

The surge in land taxes is expected to worsen the rental crisis, as investors may pass on the increased tax burden to tenants, leading to higher rental rates.

Investors should evaluate whether the anticipated future returns justify increased land tax liabilities, and consider geographically diversifying their portfolio to potentially minimize land tax obligations.

State governments’ policies, including increased land taxes and compliance obligations, have raised costs and risks for property investors, contributing to the rental crisis.

In recent weeks, state governments have been sending out land tax notices to property investors.

The noticeable increase in land tax receipts over the past few years has prompted more investors to reassess their property investments.

Furthermore, the surge in land taxes is anticipated to exacerbate the rental crisis.

Property investors are likely to pass on a portion of the elevated tax burden to tenants.

Considering the already constrained national rental market, it’s inevitable that the land tax hike will contribute to a further rise in rental rates.

For instance, in Victoria, the total land tax revenue has surged by over 300 per cent, jumping from $1.8 billion in the 2016 financial year to a projected $6 billion in the current financial year.

Land Tax By State In 2024

Similarly, the NSW government has experienced a significant increase in land tax, soaring from $2.7 billion in 2016 to almost $7 billion in the present financial year.

Despite this meteoric rise in land tax, the median house gross rental income has only seen a modest increase of around 30%, and house values have risen by almost 45% over the same period.

This indicates that land tax has outpaced the growth in investment returns.

In essence, land tax bracket creep is causing investors to pay a substantially higher amount of tax compared to eight years ago.

Land tax is imposed by state governments, based on the value of land holdings on December 31 each year.

Land tax is a marginal rate system, meaning the more land one owns, the higher the applicable tax rate.

It is calculated based on the unimproved land value assessed by the state’s valuer general, the same valuation used for council rates.

Generally, primary residences are exempt from land tax, but it applies to investment properties and holiday homes.

The rates for land tax differ among states, with many imposing higher rates for properties held in discretionary family trusts.

Land Tax

Property investors are entitled to claim an income tax deduction for land tax paid which effectively means that the federal government picks up some of the bill.

In 2023, the Queensland government swiftly dropped an impractical and unjust proposal to impose land tax on properties situated outside of Queensland.

Victoria, as part of its COVID Debt Repayment Plan, notably implemented a temporary land tax surcharge.

This initiative involved reducing the land tax-free threshold from $300,000 to a mere $50,000!

As a result, approximately 380,000 property investors are anticipated to pay land tax for the first time this year.

These investors will receive their land tax bills this month.

Victoria’s new land tax surcharge disproportionately impacts investors with smaller property holdings, leading them to incur significantly higher land tax compared to investors in other states.

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