Land Tax and Investment Properties
Land tax is one of those insidious taxes that tends to not appear on investors radar, until they have acquired a few properties. It can be a nasty surprise and a hit on your cashflow if you are unprepared.
NSW Land tax is calculated on the combined value of all the taxable land you own above the land tax threshold. The rate of tax is currently $100 plus 1.6% of the land value between the threshold and the premium rate threshold and 2% thereafter. Some investors become confused here as they believe the land tax rate is based on the house and land, however it is the land component only that the OSR considers here. For example, if you own an investment house worth $700K, with a land value of $350K then you are not liable for any land tax. However, if you owned two such properties then your taxable land value would be $304K, which means you would be up for an annual bill of approx $4,960. Not cheap, and certainly a disincentive to those investors planning to buy several properties within the same state.
If land is owned by a trustee of a special trust, however, the land tax threshold does not apply and land tax is charged at a flat rate of 1.6% of the taxable land value up to the premium threshold of $2,366,000 and then 2% thereafter. For those investors considering setting up a trust they need to consider this carefully and seek advice from their accountant as to the best setup and structure for their individual circumstances.
Given that we regularly search for several interstate investors it is interesting to note that one of the reasons cited for wanting to invest outside of their own state is to spread their risk and minimize land tax. It certainly can eat into your yield quite significantly if not accounted for. For further information regarding land tax rates here in NSW visit the OSR site here.