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Who will pay the extra land tax?

Land tax changes are coming. Who will pay?

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Following Victoria’s State Budget land tax changes are on the way. The existing land tax structure will be adjusted to catch more property investors, secondary property owners (holiday homes) and increase the take from those already paying it.

Quick land tax refresher.

Land Tax is calculated on the land value of a property as assessed by the council. Many types of property such as the principal place of residence (family home), farms and charities / religious institutions are exempt from land tax (and will remain so).

Councils assess the land value of every property which is shown on the council rates notice along with the capital improved value and net annual value.

Land Value is the unimproved value of the property. That is, it assumes absolutely nothing is built on it.

For apartments, the land value is their relative percentage of the total land value on which all the lots are built. For many owners, the land value of their apartment is less than the current land tax threshold of $300,000. In this case they pay no land tax at all but that is about to change.

Land tax is assessed on a multiple holding basis within each state so if you own multiple properties that attract land tax in Victoria, the amount is assessed on the total land value.

What has changed?

From 1st Jan 2024, the land tax free threshold will drop from $300,000 to $50,000. Also, if the land value of your investment property is already over $300,000, you will pay a higher amount of land tax.

As an example, if your investment apartment’s land value is $150,000 you have not been paying land tax. But after 1st Jan 2024, you will.

Also, the absentee investors (foreign owner) surcharge is increasing from 2% to 4%.

How much is the new land tax?

Here are the new land tax rates from 1st Jan 2024.

Land Value  Land Tax  
Less than $50,000NIL
$50,000 – $100,000$500 p.a.
$100,000 – $300,000$975 p.a.

For land values over $300,000, land tax is calculated on a sliding scale where the existing land tax will increase by an additional $975 plus 0.1% of the land value over $300,000.

The assessed land value of most one and two bedroom apartments will be under $500,000 depending on how many apartments are in the development and the underlying value of the land.

Who will end up paying?

Property investors incurring a new or additional land tax will need to decide if they,

  1. Pass on the extra cost to renters
  2. Absorb the cost or
  3. Something in between.

At a broader market level, the additional tax will make some investment owners think about selling. It will also discourage potential investors to buy. Consequently, it will reduce the total pool of rental property available. Consequently, market rents will be pushed higher, regardless of investors decision to pass on the increase or not. Supply and demand is a much more powerful market force.

Whist unfair, it is inevitable that renters will pay most of this tax by way of higher rent. Given the rental market is already tight and living costs are rising, this extra cost that will hit renters pockets is very unfortunate and (I assume) an unintended consequence of the impost intended for investment owners.

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