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Land tax on investment property

Land tax on investment property – what has changed?

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The impact of the changes to land tax on investment property depends on several things.

  1. How many properties you own.
  2. The value of the properties (land value)
  3. If you own houses or apartments.
  4. If you are an Australian tax paying resident or not.

Land Tax rate changes came into effect in Victoria on 1st January 2024

The previous land tax structure was 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 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 threshold has now changed.

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 changed?

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

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

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

How much is the new land tax?

Here are the 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. Land tax prior to 1st Jan 24 increased 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 is making some investment owners think about selling. It is also discouraging potential investors from buying. Consequently, it is reducing the total pool of rental property available. Therefore, market rents are being 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.

Further land tax issues.

With the rise in property prices over the last 5 years, land tax is looming as a bigger issue for many property investors. (Note:  there is no land tax on your family home).

Land tax is assesed on the land value only of a property so it disregards the value of the improvements. If you own an apartment, the land value of that apartment is the total value of the land the building is on divided amongst the apartment owners proportionally. Consequently the land value of an individual apartment may be very small and so it sits under the land tax threshold of $300,000 (in Victoria in 2023 but changed to $50,000 in 2024)

A rise in property prices is actually a rise in the underlying land value of that property. The replacement cost of the buildings on that land may rise incrementally or decline. Building values often depreciate over time depending on their quality and architectural appeal.

The value of an apartment, comprises a relatively small percentage of land value comparted to a house, which is part of the reason apartment values don’t tend to rise at the same rate as houses. While this may seem like bad news for investment owner there is also good news.

In Victoria, land tax was previously levied on investment property with a land value under $300,000 but from 1st Jan 24 that dropped to $50,000.  Therefore, for many apartment investors, land tax was not even on their radar. But for property investments with a larger land component, the recent surge in property values and threshold change, this is causing some real headaches.

While it may be argued an increase in land tax is offset by an increase in total capital value, many investment owners live off the income of their real estate. They may be relatively asset rich and cash poor, making the land tax bill problematic. Also land tax is calculated on a multiple holding basis across all assets, ignoring variations in holding entities with common beneficial interests. For most aparmtment investors the new $50,000 threshold is being quickly passed.

Land tax calculator

Land tax for Absentee owners is calculated at a higher rate than Australian tax payers. As an example, (using the SRO land tax calculator), a property investment with a taxable value of $500,000, will incur a land tax bill of $10,775 for an absentee owner, compared to $775 for an Australian tax payer. (using a 2023 assessment year). This was highlighted in a recent SMATS Group (Australian Property, Tax and Financial advisers) news article.

This enhances the case for the income return attributes of apartment investments, and with rents rising this will continue to improve throughout 2024.

9 Responses

  1. Land Value(s) in NSW for 2023 (in my land tax assessment) have increased by 24% over those of 2022
    I understand that this years (2023) valuation was at 1 July 2021 in terms of the Valuation Act in NSW
    In NSW Sydney Land and house prices for the year 2021 -2022 peaked at 27.7% as at January 2022 according to Core Logic Home Value Index. Since then, they record the decline from the peak to December 2022 at 12.7%
    I assume that Land Values for the year 2024 MAY partially reflect part of that decline of 12.7%
    However, from an investment point of view the tax increase now in the current NSW Land Tax Assessment Notices over last year is not sustainable and the only option for an investor is to pass on the tax increase onto the tenants, further affecting the years inflation figure.
    As an investor, relief is needed now not in another 12 month’s time.

  2. Not bad Mr Andrews, you mismanaged our economy during Covid, then froze any due rent rises for tennants. This left us Landlords carring that extra cost & in some cases, the tennant couldn’t even pay thier due rent, and for the hardship the Landlords endured over this period, your Goverment is going to force up rent, & reduce investment appeal. We may as well sell our property & put it into our Superannuation.

  3. My land tax now equates to $166 per week, how can I pass this on to my tenant?
    It is way outside an acceptable rent rise.

    1. You can’t pass on the tax directly Mat. That said many business are passing on the increased cost of wages, compliance and other inputs to their customers by way of higher prices which is showing up in inflation. You can charge the market rent for your apartment what ever that may be. If all landlords costs are going up it is pretty obvious what will happen.

  4. I bought a 2 unit site with a friend in Victoria.
    It is in joint names.
    It is on one title, but separately rated by the council.
    I live in unit 1 as my PPR.
    my friend lives in unit 2 as his PPR.
    We have been charged land tax on 50% of each other’s unit. $975 each.
    I’m retired and really can’t afford the extra tax.
    There is no investment income as they are PPR’s.
    Do we have to pay land tax or are we exempt somehow?
    There is only one title and no income, can you clarify please.
    Would really appreciate your help.Cheers.

  5. Hey Andrew, thanks for breaking down the changes to land tax on investment properties! It’s definitely a hot topic for property investors. The drop in the tax-free threshold from $300,000 to $50,000 and the increase in surcharge for absentee investors are significant shifts. It’s interesting to see how these changes might impact both investors and renters in the market. The discussion around passing on the cost to renters versus absorbing it adds another layer to the equation. Looking forward to seeing how the market responds to these adjustments in the coming months!

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