Land tax is a critical yet frequently overlooked consideration for tax advisors in Perth. While most families prioritize these ‘big-ticket’ taxes when organizing their investments, the land tax remains a significant factor, especially as a family’s property portfolio expands.
What is Land Tax in Perth?
Land tax is an annual levy imposed on Perth and Western Australia property owners. Unlike more commonly discussed taxes like capital gain tax or GST, land tax often flies under the radar for many tax accountants in Perth, yet property investors must understand its implications. This tax applies to properties not used as the owner’s primary residence and is payable yearly in advance.
In Perth, the land tax rate is calculated on a marginal basis. The more land you own, the higher your tax liability. It’s a key consideration for anyone growing a property portfolio, as the costs can accumulate significantly over time. The tax rate kicks in based on the property’s valuation as of June 30 each year, emphasizing the importance of the property’s purpose at that date for tax assessment.
The Reality of Land Tax Costs
As families increase their real estate portfolio, the cost of land tax rises. Commercial property investors may transfer this cost to their tenants, but that doesn’t negate the fact that the landlord ultimately bears the expense.
High land tax costs will mean that the property’s variable outgoings are higher. A property with high variable outgoing costs will ultimately impact the market rent commanded from tenants. Tenants look at the total cost of renting the property. So, the landlord will ultimately bear a high land tax bill through reduced rental income.
Key Land Tax Assessment Date
You’ll be subject to land tax if you own a property that isn’t your primary residence as of 30 June. The tax is prepaid annually and depends on the property’s intended use as of 30 June. If you convert a rental property into your primary residence after 30 June, you won’t be eligible for a land tax refund for the time you owned the home.
There are some exemptions available to charities and farmers.
Land Tax Rates: A Sneak Peek
The land tax rate operates on a marginal basis, meaning the more land you own, the higher your tax rate will be. For instance, owning land valued at $420,560 outside of your primary residence will incur a land tax of $440, or a rate of 0.11%. However, owning $4 million worth of land could yield a land tax bill of $53,730, demonstrating how the tax rate can escalate.
Limiting Land Tax Expenses
Once you own property, reducing your land tax liability becomes complex and simply selling the property could incur other taxes like transfer duty and GST (maybe reducing the GST with the margin scheme). So, transferring a property later on to another person or another tax entity could trigger capital gains tax or stamp duty that is so high it is not worth the transaction.
Moreover, the Land Tax Assessment Act of 2002 contains an anti-avoidance clause that permits the Commissioner of State Taxation to scrutinize any restructuring to manipulate land tax.
So, if you are purchasing a property, getting land tax advice from your Perth tax accountant is critical in your long-term family wealth planning.
Strategic Planning for Land Tax
If you’re considering a long-term property investment, planning for land tax should be a cornerstone of your strategy, alongside asset protection, GST, and income tax considerations. In Western Australia, land tax isn’t aggregated across related entities. Therefore, distributing property ownership across legal entities can offer substantial land tax relief.
In Western Australia, the land tax you owe isn’t calculated by adding up all the land you own through various companies, trusts, or partnerships—a process known as aggregation. Instead, each ‘legal entity’—whether it’s you individually, a company you own, or a trust you’re a part of—is taxed separately. This provides an opportunity for significant tax savings.
It is important to note that some states aggregate land tax values across entities. And Western Australia can always change the law moving forward.
To put it in perspective, let’s say you own ten properties, each valued at $1 million, all under the umbrella of a single company or trust. The annual land tax bill would amount to approximately $180,130 in this scenario. However, if you diversify the ownership of these properties by holding each one under a different legal entity—like ten separate companies or trusts—your land tax bill could plummet to just $27,930. That’s a staggering reduction, highlighting the value of well-thought-out tax planning.
And that reduction is a yearly tax benefit generated through solid tax advice.
Jointly held properties and land tax
The land evaluation for tax purposes is conducted independently for each parcel you own, whether you own it individually or jointly with others. In other words, land you own solely is assessed separately from any properties you co-own with one or more persons.
To illustrate, let’s say you have ownership of three different lots. The first lot is solely under your name, the second one you own jointly with John Smith, and the third property is co-owned by you, John Smith, and Jane Doe. In this scenario, each property would undergo individual assessment for taxation purposes.
This method of separate assessment is essential for understanding your overall land tax obligations, as the ownership structure can influence the rate of taxation. So, each lot—individually or in partnership with others—will have its tax liability, contributing to your total land tax burden.
The land tax implications of sub-dividing a block of land
The potential financial implications surrounding the subdivision of land are important, particularly when it comes to retrospective land tax assessments. According to the Land Tax Assessment Act of 2002, certain types of land are generally exempt from land tax. These include lands classified as private residential properties, those used in primary production businesses, and areas designated for dwellings or residential parks.
However, the rules change when you subdivide this land. Once subdivided, specific portions may become taxable retroactively for up to either five or ten previous years, depending on various conditions. What’s interesting—and potentially problematic—is that the responsibility for this retroactive tax falls on the current owner at the time of the subdivision. This remains the case even if the previous owner was the one who benefited from the tax-exempt status and then sold the land to you.
For each retroactive year, you’ll be assessed based on the land tax rates applicable during that specific year. This amount is calculated as if the newly taxable land was the only property you owned at the time of each assessment. If you’ve already paid any land tax on the subdivided portion for any of those years, that amount will be deducted from your new tax liability.
In summary, if you’re considering purchasing land that could be subdivided, or if you’re considering subdividing land you already own, it’s crucial to factor in the possibility of a retrospective land tax assessment. I highly recommend consulting with tax professionals well-versed in land tax regulations to navigate this complex landscape effectively.
Long-term land tax planning
Land tax is state based, so it only considers the land held within Western Australia. So, the marginal land tax rates only apply to land held in Western Australia. Suppose you own significant land in another state of Australia and a single property in Western Australia. In that case, your land tax rate will only be assessed on the marginal tax rate of the Western Australian property. Your land will not be aggregated with the other states. So, a higher marginal tax rate generated from your Eastern States holdings will not be applied to your single Western Australian property.
This way, we have helped structure clients’ properties across different states to reduce land tax costs.
The same approach also applies if you hold properties overseas. However, the offshore property held will have international tax impacts that should also be considered in the home country.
Land tax is an essential factor that should not be overlooked in investment planning. Our Perth-based tax advisory firm assists families in business with property tax structuring. We are focused solely on families in businesses, so we offer tailored, independent advice that genuinely impacts your long-term financial planning.
So, if you are looking at a land tax assessment for your portfolio and its starting to bite you should contact us to see how we can help. We don’t charge the first upfront meeting for families with large property portfolios so call us to see what we can do.