Episode Details

Land tax is levied on the value of an investor’s landholdings on 31 December each year. It is an insidious tax as any land tax is relatively small when you initially purchase an investment property but typically increases each year. As such, the problem is that it can become quite costly by the time you reach retirement – a time when it’s preferrable to pay less tax, not more.

There may be several opportunities to minimise land tax which are discussed in this blog.

Land value is a vital attribute of an investment-grade property

The value of a property comprises of the value of the underlying land plus the dwelling’s value (i.e. improvements that are permanently located on the land). Typically, land appreciates in value over time whereas buildings depreciate. Therefore, to maximise your property’s rate of capital growth, you must invest in property’s that have a high land value i.e. more than 50% of the property’s value should be in the land.

There are a couple of consequences of investing in high land value properties:

1. High land value properties tend to produce low rental yields. That’s because renters don’t really care about the value of the underlying land. Renters are more impressed by the size and quality of the accommodation; and

2. High land value properties attract higher land tax liabilities.

Remember, the power of compounding capital growth more than compensates investors for these disadvantages.

In the past, it hasn’t been wise to own property in a company but…

One of the major disadvantages of owning investments in a company is that a company is not entitled to the 50% capital gains tax discount.

If you realise a capital gain in your personal name of $100, you can discount that gross gain by 50% if you have held the investment for 12 months or longer. As such, the investor will be taxed on a net gain of $50 at their marginal tax rate. If they earn over $180,000 p.a., their rate of tax is 47%, so they will pay $23.50 in tax. In short, the maximum rate of tax in respect of CGT in their personal name is 23.5%.

If a company makes a capital gain of $100, it will pay tax on the whole gain as the 50% discount is not available. As the corporate tax rate is 30%, it will pay $30 of tax.

In this situation, the investor that uses a company pays a high tax rate by 6.5% (i.e. 28% more in tax). As such, companies used to be an unattractive ownership structure (also because negative gearing losses are trapped).

But the company tax rate has reduced in some situations

Companies that meet the eligibility of ‘base rate entities’ will be taxed at the flat rate of 25% from this financial year onwards. A company is a base rate entity if its turnover is less than $50 million and 80% or less of its income is passive income (which includes rental income).

This could create a good opportunity for self-employed taxpayers if they are able to distribute business income into a corporate beneficiary, so that the non-trading investment company meets the ‘base rate entity’ definition. In this case, the rate of CGT would be 25% versus 23.5% in a personal name. This is a far more palatable outcome, especially if a company ownership structure helps reduce land tax liabilities, as discussed below.

State based tax regime

Land tax is a state government tax, and each state has different rules. Principal places of residence do not attract land tax. But any properties in addition