A client was talking to a mate...
...who warned about rising property values in NSW and complained they had been hit with a Land Tax bill out of the blue, with 40% penalty for late payment!!
This prompted the question put to us: will our client 'suddenly' become liable for land tax on their residential property as the value increases?
As with all financial and tax matters, it depends. As Chromatic head office and the client (and mate) in question are in NSW, the below will not necessarily apply in other states. Note this is a separate topic to the First Home Buyer Choice and Property Tax.
Taxable Property
If you have business or investment property, a vacant block or holiday home, all such ownership interests are added together and you may be liable for NSW Land Tax if the combined value of NSW land is over the annual threshold.
Your Home is Safe
If you own your home, it is exempt from NSW Land Tax.
Should you move away and leave the home vacant or rent it out, then it will lose the Principal Place of Residence Exemption and Revenue NSW should be notified.
Farming Properties
Primary Production land is generally exempt, if it's zoned appropriately and actively used in a primary production business, not necessarily by the owner. Even if the zoning is residential, the case can be made for a Primary Production exemption based on the business's characteristics and the features or setup of the land.
Properties indirectly owned
If you hold property in a company, it's assessed the same way as a natural person, except it can't have a Principal Residence. If there are related companies or people (think, under or having common control) who also own taxable land, only one threshold will be allowed for the group.
If you have a trust situation (including deceased estates and Self-Managed Super Funds), land tax will also apply. These entities can't have a Principal Residence either, but the threshold should apply unless it's a "special trust" where only the trustee can be identified as the owner (that is, no particular beneficiary is specifically entitled to the trust property), or an SMSF that's marked as non-compliant.
Working out the Land Tax
Land tax is automatically assessed on land holdings over the threshold value, as at 31 December each year (assessments are issued generally in January). There is no adjustment in the assessment for having held the property for less than the full year. The purchase price of your property may not be the value you see on land tax records, for a combination of reasons;
- the 'unimproved' value, i.e. without buildings, as determined by the Valuer General is the amount taken into account, and - the tax is applied to a three-year average value of the land, which is something of a 'buffer' in these times of rapid increases.
For 2023, the general threshold is $969,000 over which $100 plus 1.6% of the excess land value is payable. There's also a premium threshold of $5,925,000 above which the land tax rate is 2%, and a surcharge (with no threshold) for foreign owners of residential land in NSW.
Old Mate's Bill
Say our mate owned, at 31 December 2022, his home worth $900k, a farm* valued at $600k, a beach shack up the coast valued at $100k and a factory he rents out, on land valued at $1.5mil.
Total land value: $3.1mil^
Principal Place of Residence exemption: $900k
Primary Production exemption*: $600k
Taxable land value: $1.6mil
2023 Threshold: $969,000
Value above Threshold: $631,000
Land Tax payable = $100 + 1.6% x $631k = $10,196
If our mate is on the ball he can pay on time and receive a small discount, or he can opt to pay in four instalments as detailed on the notice from NSW Revenue.
^ Let's assume that the values haven't moved much in three years so the averaging makes no difference in this case.
* The farm is in a rural-residential land zone and the tenant runs cattle there which they sell for their main income.
If you are concerned about a Land Tax Assessment you have received, or do not believe it to be correct, you are encouraged to pay the assessment on time to avoid interest penalties, and if there is an error you should be refunded in due course. Contact us as soon as possible so we can review your records and set an objection in motion if need be. Chromatic Accounting & Tax can assist with not just income tax and GST but also state government tax matters including estimates - just drop us a line...
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