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Market Wrap & The Scourge of Land Tax

Market Wrap

It was a very quiet on the auction front last weekend due to the Queen’s Birthday holiday. The REIV reported just 242 auctions of which 179 sold, for a clearance rate of 74%, a little down on last weekend where the clearance rate was 83%, but still a very strong result.

Melbourne wide, the clearance rate in May was 81%, the highest for the month of May since 2009 according to REIV CEO Enzo Raimondo.

The most expensive house sold was 9 Bringa Avenue, Camberwell which sold for $3,316,000 the big mover in suburb growth, Glen Waverley saw the sale of 1 Blair Road for a whopping $2,450,000. The cheapest sale was in Craigieburn, little surprise there, with 5 Eve Court selling for just $330,000.

The most expensive unit sold, was again out in the Eastern suburbs when 1/12 Derby Street, Blackburn sold for a staggering $1,150,000, trumping Glen Waverley where 1/7 Fairhills Parade sold for $1,005,000. The cheapest unit sold was in Taylors Lakes for just $295,000.

Land Tax Scourge

The ‘scourge of land tax’ raised its head again this morning when a client emailed me to query a massive jump in his Land Tax bill. His last bill was just $575 for house and flat worth about $1.2m, but after buying a holiday house for a little over half that value he got ‘bill shock’ when he received a land tax bill of nearly $2000, Could that be correct?

I did a review and found that indeed it was correct.

Several factors conspired to ramp up his land tax assessment:

  1. They purchased their holiday home in a trust where land tax applies for land value above $25,000
  2. Trust owned land is tax at 0.37% commencing at the much lower threshold of $25,000
  3. The tax is applied only to the land component, my client’s initial investment properties included a house with low land value and a flat with ‘notional’ land value
  4. Both existing properties were purchased in their personal names, where there is a tax free threshold of $250,000, hence the relatively cheap previous tax bill
  5. The marginal tax rate for land value held in personal names is just 0.2% where the value is between $250,000 and < $600,000
  6. The land component of my client’s holiday house was greater than the combined value of both existing properties.

So, what is their learn from this experience?land tax

  1. Don’t buy in a Trust unless there is a good reason to do so, instead buy in your personal names where no tax applies until your land component reaches $250,000.
  2. Think twice about ever considering the purchase of a home inside a Trust as your tax free threshold drops by 90% and you may be liable for capital gains tax also, plus the tax office will take a very close look at any deductions you claim.
  3. When buying a property in personal names consider buying as ‘tenants-in-common’ rather than ‘jointly’ as ‘TIC’ allocates the percentage ownership whereas ‘jointly’ assumes both own the property effectively doubling your holding liability for land tax.
  4. Comparable houses can have substantially higher land component than flats.
  5. Always, always get competent advice BEFORE deciding which entity in which to purchase a property, the tax consequences can be huge.