IPA

New land tax rules to impact investors

TONY GRECO is technical policy general manager at the Institute of Public Accountants. Queensland has pulled the trigger on accounting for the value of land held interstate when assessing taxpayers’ land tax liability in Queensland. The state is the only jurisdiction to introduce this type of aggregation rule to include Australia-wide landholdings.

The interstate land tax measure is effectively a tax rate hike for all entities that hold land in Queensland as well as another Australian jurisdiction. It will have no impact on landholders who only hold land in Queensland.

If landlords pass this added impost onto tenants, this may force some rents to increase in the future. For residential properties this may exacerbate current affordability issues for tenants and will be unwelcome.

There is low awareness of the impact of this change, so it will come as a surprise to most investors when they receive their next land tax bill.

From 30 June 2023, an owner’s liability for land tax will be determined based on the total value of their Australia-wide landholdings that are not exempt, rather than solely on their non-exempt Queensland landholdings.

This value will be used to determine whether the owner has exceeded the tax-free threshold and the applicable general rate of land tax, which will ultimately be applied to the Queensland proportion of the value of the Australia-wide landholdings.

To illustrate the impact of the change, the following first two examples show the additional cost impost on individual investors holding two properties below the respective land tax thresholds and another more common scenario where the individual investor already incurs land tax and the impact when other holdings are amalgamated. The third example shows the financial impact on an SMSF that has a landholding in Queensland below the land tax threshold, but also a property investment in another state.

Examples An individual landholder with $599,999 in taxable land in Queensland and $400,000 in New South Wales would pay no land tax for the 2023 financial year as the Queensland landholding is under the exemption threshold. Under the aggregation of interstate properties changes, land tax will be payable in Queensland despite both properties falling under the respective state land tax exemption thresholds. For each following year this individual will be paying $2700 in land tax even though both properties fall under the land-tax-free threshold.

An individual landowner owns land in Queensland with a taxable value of $745,000 and also owns land in Victoria valued at $1.565 million on 30 June 2023. The land tax bill would be $1950 for the 2023 financial year, but under the aggregation of interstate properties changes the land tax bill in Queensland will increase to $8422 for each of the following years.

An SMSF has a villa unit with a land value of $300,000 in Queensland and one also in Victoria with a land value of $700,000. As the Queensland land value is under the exemption threshold, the SMSF will not be liable for land tax for the 2023 financial year. Under the aggregation changes, for each of the following years the SMSF will be paying $3315 in Queensland land tax.

We expect there will be some practical difficulties around implementation as there is no uniformity between the land tax rules in each state and territory. Also, not all jurisdictions impose land tax. The Northern Territory does not impose land tax, for example.

Our federal tax system is in urgent need of reform to make it sustainable. If the federal government proceeds with major tax reform, it will invariably impact many state-based taxes such as land tax. While we cannot pre-empt what any future government will contemplate going forward, the case for change is building and we envisage major tax reform as a likely possibility in the immediate term to ensure our tax base is sustainable to meet ever-growing government expenditure and an ageing population.

If this scenario comes to fruition, we envisage a greater role for taxes such as land tax. The Henry tax review recommended the abolition of stamp duty in conjunction with the introduction of a broadbased land tax placing landlords and homeowners on an equal footing. The Australian Capital Territory is already 10 years into a 20-year transition period of replacing stamp duty with land tax. NSW is also proposing a hybrid option of allowing first-home buyers a choice of paying stamp duty or an annual land tax. Queensland is not alone in making changes, but there does not appear to be any consistency among the states and territories.