All Topics / Legal & Accounting / Help in minimising land tax please.

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  • Profile photo of elkamelkam
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    @elkam
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    Would someone like to help please by explaining how they handle land tax. Are there any good ways of minimizing this? I am in the middle of trying to get a handle on this area before I buy any more IP’s.

    My IP’s are in Victoria but I assume the same sort of system of calculating land tax is used in all states. By this I mean they add up the unimproved capital value of all your properties and charge you as if it was one. This is heaps higher than if you were taxed on each individual property separately.

    Previously, for property held in a DT, this aggregation only applied to property held in that one DT so I guess by having several DT’s , besides all the other benefits, you could save on land tax. ? ( I only have 1 so this part is all theory for me [smiling] )

    However the SRO has now changed the law in Vict.

    For a DT, you get a one time chance to nominate one of the beneficiaries as being responsible to pay the land tax for property held by the trust. This is then aggregated to any property this person holds privately (except PPOR). Any property bought after 31 Dec 2005 does not get this chance and pays the surcharge. Not nice at all. [grrr]

    Obviously, for this one time, it’s better to pick a potential beneficiary who does not and preferably never will, own property in Victoria.

    This is not so for fixed or unit trusts if the SRO has been notified of the unit holders (otherwise surcharge applies). It then just “looks through” the trust . However, besides the fact that these trusts are less flexible (I think?) the land tax still gets charged back to individual unit holders.

    Judging by some of the posts here there are investors on this forum who own many many properties. This means massive land tax bills.

    More specifically I am wondering about the following.

    1. If you are doing buy, reno and sell do you avoid land tax if you hold the property less than a certain period of time?
    2. I understand from some of the posts I’ve read here that in a wrap you, the vendor, are still responsible for the land tax among other things, until the end of the wrap . It’s been suggested that you just charge this back to your buyer. That’s fine for 1 property, but if you own many than your aggregated tax for that property could be huge. Your buyer will only pay the base tax unless it’s their PPOR in which case he/she needs to pay nothing. What am I missing here? [confused2]

    Are there any structures that help with this problem? I mean, unlike CGT which is a 1 time thing per property and income tax which is a proportion of what you earn, land tax can quickly add up to massive amounts EACH YEAR. [crying]

    I’m sorry for the marathon post. I hope it makes sense to someone.

    Any help would be truly appreciated. [exhappy]

    Elka

    Profile photo of ptnptn
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    Hi Elkam,

    I’ve been eyeing this post for a few days now; hope to find an answer too. Hope someone can provide help.[cigar]

    Any expert advice???

    ptn.

    Profile photo of elkamelkam
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    @elkam
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    Hello ptn.

    Glad to hear from someone. [smiling]

    I have also been checking this post eagerly and I’m surprised …… and disappointed.

    After 6 days, not only is yours the only post, but relatively few people have even read the topic.

    Is this because :-

    1. Land tax is a dirty word (or 2) on this forum?. [blush2]
    2. Everyone has put it into the “too hard” basket?.
    3. Or… no one sees this as a problem, in which case what am I missing ?

    I have always bought negatively geared properties with good capital growth potential but
    about a month ago I bought both of Steves books about CF+ properties (0 – 130 and $1M in props in 1 yr.) and literally devoured them. That is how I came to this site.

    Since then I am continuing my education before I jump into buying more (hopefully CF+) properties. I’m always shocked at the size of my land tax bill. With the change re land tax for DT’s and unit trusts in Vic. it’s just made things worse.

    I will start the ball rolling.

    1. Split your investment properties over different states and /or countries ?. This is logical but hard to do for me. I only know the Melbourne market and buying from overseas it’s hard enough buying in an area I know.
    2. Have different DT for every property. This way you always pay the surcharge but it’s still cheaper then if you have to pay on the aggregate of all your properties.?

    Anyone willing to help please? Specially with the 2 questions in my first post.

    Elka

    Profile photo of oziozi
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    @ozi
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    Hi Elkam,

    Sorry I can’t help, but I too am asking the same questions and eager to hear from people who have knowledge on this topic. I’m sure there are a few forumites out there who can help.

    Regards,
    Ozi

    Profile photo of crjcrj
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    I think there was an article in API a couple of years ago. Choices could include purchasing property in different states as land tax is a state tax

    Profile photo of TerrywTerryw
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    Don’t really think there is much you can do to minimise it unfortunately.

    Terryw
    Discover Home Loans
    Parramatta
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    Profile photo of DazzlingDazzling
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    Hiya Elkam,

    Looks like you are struggling with an issue that is very very large and looming as the props. get larger in value.

    The SRO is a large and difficult beast to grapple with….escaping their clutches is nigh on impossible.

    We were in your position about 3 years ago, actually paying about $ 36 K p.a. in Land Tax every year. It was getting beyond a joke, so we changed tactics. Our Land Tax bill has increased to $ 64 K p.a. but we only need to chip in $ 13K p.a. of this, so it still is unpleasant, but not that bad.

    I started a thread on this very subject about 6 months….if I was clever I could link it in…..but unfortunately i’m not. [dunce]

    We now graciously allow the tenant to pay the Land Tax bill, where appropriate, and so now our burden has been eliminated in places. They will only pay LT on a “single ownership” basis, so make sure you get your structure right.

    If the tenant won’t pay the Land Tax bill, we don’t buy the asset – simple…..it is very central to our decision making process.

    I had a meeting with a high powered solicitor who specialises in Land Tax in my home state last month to thrash out some stuff as I thought the legislation was a bit wishy washy. [dead2]

    What we were trying to wrangle was a no go…..the people that draft the legislation don’t leave much in the way of crumbs…..hence, our tactic of lumping the burden back to the tenant. [thumbsupanim]

    Have a search for that thread if you want…..there is very slim pickings to be had trying to avoid Land Tax.

    Good luck with your investing endeavours.

    Profile photo of brahmsbrahms
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    If land tax is a state legislated tax, surely if you purchase inv prop’s in various states this will help minimise your exposure in each state and therefore minimise your exposure to that states land tax.

    not perfect nor a solution for elkam as your portfolio is existing – maybe sell one in vic and buy in another state? maybe the math will work out in the medium/longer term?

    its also a nice method of diversification – any thoughts on this?

    cheers

    brahms
    Purveyor of Fine Finances
    aka Mortgage Broker Brisbane

    Profile photo of ptnptn
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    I hope CATA could give some input into DT info on land tax and their implication.

    Like you Elkam, I’ve bought Melbourne IP only and are forced into paying large land tax bill. I like to understand what happen if you have 3 DT each containing a 300k mortgage; are you forced to pay aggregated amount of 900k or just a land tax bill for each 300k value.

    What if
    DT #1 has only 1 director Me
    DT #2 has only 1 director My Wife
    DT #3 has Me and my wife.

    How can the SRO aggregate these properties? or can they?

    Interestingly, I owe a city apartment under my name only but
    the SRO land tax bill has no collection of this property. It appear that only IP in join name between my wife and I get aggregate.

    My brother inlaw reckons that the SRO finds CBD apartments too complicated to calculate Land Tax implication.

    Regards
    ptn

    Profile photo of elkamelkam
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    Thank you everyone for your reponses at last. [exhappy]

    For those who haven’t found it here is a link to the thread that you where refering to Dazzling.

    https://www.propertyinvesting.com/forum/topic/19858.html?SearchTerms=land,tax

    I am still mulling over it. [confused2]

    Be well
    Elka

    Profile photo of elkamelkam
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    Hi ptn

    I am no accountant but having been to a “Land Tax, The new Regime” lecture held by my accountants office recently, while on a flying visit to Oz to see my family, I will try and answer your last post.

    Firstly, if you currently have a DT holding property I suggest that you get in touch with your accountant URGENTLY. Actually he should have been in touch with you. See my first post.

    If you now buy property under the structure you suggested then it does not matter who the directors are. ( Actually it never mattered who the directors were. )

    Each DT will pay land tax seperately (which is how it has always done) but will now always be charged the surcharge on top of the normal land tax. The surcharge is 0.375% on top of the normal rate for that bracket..

    Note that the tax free threashold is now $200k. in Vict.

    So for example

    DT#1 has land totaling $199k.

    (It doesn’t matter if this is 1 property or the aggregate of all the properties held by this DT.)

    No land tax is payable as it is under the tax free threashold but you do have to pay the surcharge which in this case would be $746.25

    DT#2 has land totaling $540,000

    Normal land tax on this would be $880 but you will have to pay the surcharge of $1,825 making it a total of $2,705.

    This only gets worse the higher the aggregate value is. The good news is that at $2.7M and over, having paid $36,330 LT, there is no surcharge. [hmm] [lmao]

    Believe it or not there are some scenarios that it’s cheaper to pay the surcharge but that’s too long for this post.. I assume if you go to the SRO site you will be able to find the new rates.

    Remember the adage that a little knowledge ( i.e. mine )is a dangerous thing and go to a good property savvy accountant. for advise.

    I hope I have not depressed you too much.

    Elka

    Profile photo of elkamelkam
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    Sorry ptn, forgot to add the following.

    “My brother inlaw reckons that the SRO finds CBD apartments too complicated to calculate Land Tax implication.”

    I don’t believe that your brother in law is correct though it would be nice if he was. [hair2]

    I think it is 1 of 3 possibilities.

    1. The land value of this property is less than the tax free threashold ( which was $175K and is now $200K ) and this is the only property under your name, except for your PPOR.

    2. The SRO thinks that it is your PPOR and thus LT excempt.
    If this is the only property under your name then you would not receive a land tax notice. If you have more properties then you should receive a notice and this property should be marked as your PPOR.

    3. You recieve a LT notice under your name but this property is not listed at all. In this case you have just slipped through the cracks. Normally, at settlement ,whoever did your conveyancing would have notified the SRO of the transfer. Somehow this has not been noted correctly. However, the bad news is is that it’s your responsibility to notify them of this. Read the fine print at the back of the LT notice.

    This happened to 1 of my properties and I had sleepless nights wondering what to do. My innate honesty ( coupled with my fear of one day being charged for back years and fined penalties to boot) made me notify them of this mistake. As a reward for my honesty I am allowed to pay much much more LT. [glum]

    Just thought I’d warn you. Do whatever is best for you.

    Cheers
    Elka

    Profile photo of catacata
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    It seems to be a trade off.
    Asset Protection and other related benifits of tusts, or land tax (all though the unit trust is now a “special trust” so it will not get the land tax exemption either)

    In sunny Qld the trusts are not grouped (yet) so to minimise land tax a new trust is formed. Each state is different.

    Ifyou arepaying some tax,you are making money

    CATA
    Asset Protection Specialist
    [email protected]

    Profile photo of elkamelkam
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    That’s true of income tax and CGT Cata but they make you pay land tax even if your losing money. [grrr]

    Dazzling has the only real answer. Make your tenants pay it, which is what happens with commercial property.

    Cheers
    Elka

    Profile photo of ptnptn
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    Hi Elkam

    I don’t own any Discretionary Trust; my aggregated IPs are reaching the $900k excluding my PROP and I’ve been investigate ways accumulate more IP but at the same time minimise my Land Tax bill.

    At 900k I am paying $2680. If I buy an IP worth 350k, my next land tax bill will be $2680+$3500=$6180!!! but if my next IP goes into a DT, than I am only required to pay $1612.5 a saving of $1887.5 excluding DT costs.

    Further more, aggregated IPs in this trust must be less than 540k or I’ll have to create another DT. Seems weird but legal. (I think) unless they get grouped as Cata hinted.

    The negative is that I can’t negative gear any loss against my PAYG salary unless I do a hybrid trust which cost too much. [blush2]

    The other legal option is to have 2 PROP. This is allowed if you moved from your PROP to an IP where you get 6 months of exemption.

    In regards to CBD IP apartment requiring to pay land tax, I’ve asked all my friends who own a CBD apartment and they said it’s not in their land tax bill. And these apartments are over 300k each. [confused2]

    Thank Elkam, I needed to confirm my understanding.

    Regards
    Ptn.

    Profile photo of asdfasdf
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    From these discussions, I think you guys have pretty much hit the nail on the head – it is a cost to doing business. You can diversify as much as you want but it will always come and bit you in the bum if you want to be a serious investor. Setting separate DTs or HDTs will create a separate structure but VIC and NSW OSRs are already on to that and Qld has a different threshold. States will change rules all the time. Notice how rules will change when income from other sources dries up. ie. Valuer General starts increasing NSW land values by 100% in 2 years in a soft market when Iemma and his croonies fail to recoop transfer duties and vendor exit5 duties. Unfortunately state govts will always need to pay for their worthless bureaucrats and pension funds hence we the hard workers will pay for it through indirect taxes like payrolls, transfer, mortgage, lease duties and land taxes.

    I believe in WA you can set up different structures like 99/1, 98/2 title ownerships and that will give you a new threshold everytime however other states will just aggregate it. Again rules may change. But when you do that the banks will want all parties on the loan doc (joint & severally) & that itself will chew up DSRs on each party.

    If you put it into a HDT, you have $2K trust set up, $2K trustee co. rego plus setup and upto $600 p/yr accountant fees & co. returns. And you pay higher rates.

    NSW is looking to change the calcs though by averaging the UCV over the last 3 years. Incidently this is already being done in Qld so all you guys who think you currently have a great threshold at $400K+, wait for a couple more years. I’ve seen some massive jumps in UCVs in the inner Brissy region over the last year or so. Perhaps Beatties hoarding for another cyclone….

    Unfortunately thresholds do not increase faster than artificially determined UCVs. The $350K or so threshold in NSW is just an absolute joke. It precludes any dirt ownership within 10km of Syd CBD. Friggin thieves!!

    Profile photo of TerrywTerryw
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    Ptn

    Why do you say hybrid trusts cost too much? It may be a few hundered extra, but surely the tax saved in the first few weeks would exceed this???

    Terryw
    Discover Home Loans
    Parramatta
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    Profile photo of elkamelkam
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    Hello ptn

    Thank you for the information.

    Yes, I was also fast coming to the conclusion that forming several DTs and just paying the surcharge was still the cheapest solution.

    Although asdf has already given some figures for this, I will still be asking my accountant about the cost of setting up and then maintaining each DT as soon as he gets back from holidays. I guess the cut off land value for each DT is also dependant on the cost of the DT. Will let you know

    Interesting about the CBD appartments.

    Dazzling, you never posted the outcome of your disagreement with SRO regarding various percentage ownerships. Is it still pending?

    Cheers
    Elka

    Profile photo of DazzlingDazzling
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    I believe in WA you can set up different structures like 99/1, 98/2 title ownerships and that will give you a new threshold everytime however other states will just aggregate it.

    Hi asdf,

    I think I was responsible for erronously introducing this train of thought way back in the conversation about a year ago. We thought we were onto a winner with that one.

    However, that was the specific subject of conversation with the high powered solicitor last month. I am happy to share with you all for free that indeed this is not the case, and the WA SRO….like all it’s other brethen, simply aggregate them regardless of %age structures. This simply means you receive a very large LT bill and there is little you can do about it…..other than palm it off if the law allows it (RIP’s is a no go in this area) or your lease allows it.

    Other than palming the liability off to some other poor sod, it’s pretty much payable regardless. Either way, the SRO gets it’s pound of flesh…..just try and make sure it’s not from you.

    Pretty depressing huh !! [glum2]

    Profile photo of ptnptn
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    @ptn
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    Hi Terry,

    I originally wanted to open a Hybrid Trust but after talking to my banker at Westpac last week, he seems awfully shy and hinted complications. He said a DT is fine but HDT requires a lot of paper work and may have loan complications especially if some deeds are incorrectly spelt out.

    As asdf stated earlier, a HDT requires $2k setup fee + $600 to maintain where as a DT cost $140 to setup and $280 to maintain.
    From my understanding of HDT is that if an IP is worth $300,000, than I would allocate 300,000 units towards the setup of HDT. If I buy a 2nd IP in this HDT, I am required in amend the HDT adding more units share which could cost more. (Not sure how that works actually do you have any example of case study).

    Also I trade a bit of shares and like to roll my portfolio into the HDT. Will HDT create much complication if I mix shares and IP?

    I would love to see a case study on how all this is done.

    Kind regards
    ptn

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