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Paying too much land tax?

Paying land tax is an inevitable side effect of successful property investment and arguably a nice problem to have. Rates and tax-free thresholds vary across states but are always structured in a progressive way.  And with the tax only applicable to the unimproved portion of a holding – which is typically less than 70 per cent of the total value even for houses – little if any tax is paid by those owning a single investment property worth under a million dollars.

It is a different story if the owner has built a portfolio of say two or three houses that might be worth $3m in total and comprise $2m in land value.  In some states, the annual land tax bill in those circumstances would be over $20,000 a year. And once unimproved values move north of $4m, the marginal land tax rate can sit between 2 and 2.25 cents in the dollar of unimproved value and annual land tax bills of $50,000 are not uncommon.

Although land tax is a relatively modest portion of total state government receipts (for instance, it represents around 4 per cent of total government revenue in NSW), the amount raised has swelled in Victoria and NSW since the start of the decade off the back of strong property price growth. In Victoria alone, land tax receipts in 2019/20 are expected to be $3.7bn, over three times higher than the $1.2bn raised in 2009/10. 

Now it is both unremarkable and unobjectionable that higher land values lead to higher land tax. But there is a likelihood that some investors will be over-taxed in the current environment due to the manner properties are valued for the purposes of land tax.

In many states, the government relies on councils to manage the valuation process, adopting the same valuation data used by local government to calculate rates. In NSW, the valuation process is run by the state’s valuer general (an approach Victoria is slowly transitioning to). Generally, the assessment’s land value is an estimate on a prescribed date, typically 1 January or 1 July in the previous year.

Fresh valuation of properties are undertaken intermittently, generally on a two-to-three year cycle, although some states flag that desktop-based adjustments are made more often to reflect market movements. Overall, this is a reasonable approach that balances a need for accuracy without being onerously expensive to operate.

But the methodology leaves landowners vulnerable when prices are volatile. For instance, in Sydney and Melbourne, prices are now down 15 and 11 per cent respectively from their 2017 peaks, according to CoreLogic. But falls aren’t uniform within cities. CoreLogic reports that the top quartile of properties in Sydney and Melbourne are down 17 and 16 per cent respectively, and there will be properties that are down over 20 per cent in value from their peak.

An out-of-date council valuation that doesn’t capture a 20 per cent price drop on a portfolio comprising $4m in land holdings subject to a 2-cents-in-the-dollar land tax rate could see the investor overcharged $16,000.

Fortunately, there is always a mechanism to challenge the land tax bill. It varies across states but usually involves filling in a comparatively short form. The key to success is two-fold: one, providing evidence of comparable sales from around the time of the assessment’s valuation date that supports a lower valuation; and two, speed. In most instances, objections need to be lodged within 60 days of receipt of the land tax assessment notice.

With assessment notices usually issued in the first quarter of the year, it is now generally too late to challenge a 2019 land tax bill.  But when your 2020 bill arrives next autumn, be sure to check that the valuation genuinely reflects prices from the state’s official 2019 assessment date rather than from the peak of the market in 2017.