Land tax minimisation (or elimination) strategies

Investopoly

English - August 17, 2021 22:00 - 19 minutes - 13.3 MB - ★ - 1 rating
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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 propertyThe 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.

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