Property continues to be a popular asset investment class for Australian investors. Whilst it is important to consider all of the qualitative aspects of a property when performing due diligence including location, build quality and appearance, it is equally important to consider the quantitative considerations of the asset including rental return, holding costs, ownership costs and taxes imposed.

One of the key taxes that are often overlooked by investors is land tax. Land tax varies between states and territories and applies regardless of whether income is earned from the land.

Land tax can make or break the yield or return of a property and is complicated legislation.

Let’s look at NSW for example:

In NSW land tax is imposed on a range of owners and a range of types of property.

Owners are defined in NSW as:

• sole owner
• joint owners
• a company
• owners of company title units
• trustee of any trust
• beneficiary of a trust which is not a special trust
• society or organisation whose land is not exempt
• unit holders with interest in a unit trust which is entitled to the land tax threshold
• trustees of superannuation funds
• certain lessees of crown or local council land

And property types that land tax can be imposed on include:

• vacant land, including vacant rural land
• land where a house, residential unit or flat has been built
• a holiday home
• an investment property or properties
• company title units
• residential, commercial or industrial units, including car spaces
• commercial properties, including factories, shops and warehouses
• land leased from state or local government.

It is important to note that the main residence or home of Australian’s are exempt from land tax. The valuation that the municipal council provide to home owners is used as a base for rates notices and land tax. The rate at which land tax is imposed in NSW is below:

1. For land valued between 0 and 482,000 the tax imposed is $100 + 1.6% up to the premium threshold
2. For land value at $2,947,000 and over (Premium Threshold) land tax is imposed at a rate of $39,540 for the first 2,947,000 then 2% over that.

However it is important to note that for SMSF that own property there is no threshold allowance in NSW as SMSF are deemed special trusts.

Therefore if an investor holds a rental property in their SMSF in Byron Bay with a land valuation of $500,000 at midnight 31 December 2015 then land tax will be payable as per below:

 Valuation                     $500,000

Threshold exemption            Nil

Land Tax

($482,000 x 1.6%)          $7,712

($18,000 x 2.0%)               $360

Total Due                        $8,072 for the 2015 year

That is a considerable cost to any investor holding land in NSW in an SMSF.

Are you considering property as an asset class or investment? Before you sign any contracts make sure you contact your GMD team member to discuss the state tax issues relevant to your purchase