*Since publication, the Queensland government has announced that the proposed changes will no longer be going ahead*
From July 2023, the Queensland government will charge land tax based on investment property all over Australia, where someone also owns a property in Queensland.
Fears include that this tax increase will:
- Worsen the housing rental crisis as landlords increase rent to try to cover much higher tax bills.
- Discourage interstate investors from buying in Queensland.
- Lead to many investors selling their property, probably to owner-occupiers, reducing the number of properties available to rent
- Discourage developers who will find it harder to sell to investors, leading to a property shortage
According to the state government, the changes were introduced to close a land tax “loophole” where interstate investors with a number of properties in different states have had access to tax-free rate thresholds.
Is it actually a “loophole”?
There is only a “loophole” if the concept of a tax-free land tax threshold can itself be called a loophole. This is not the case. Let me explain.
The whole point of land tax is that it is a state tax, not a Federal tax.
The Federal income tax-free threshold is designed to encourage people to work, by not taxing the lower levels of income.
State land tax-free thresholds follow the same principle – to encourage people to invest through owning an investment property. Once they get over the threshold, often when they buy their second investment property, they are fair game for land tax for value which exceeds the threshold.
Queensland is the first state to introduce these changes, but what if every state follows Queensland’s lead? The effect would be that many interstate investors would not be able to access the threshold in their own state and are paying full land tax on the full value of all property they own in Australia.
Many people who have never paid land tax before will soon be hit, and the amounts involved are not small.
Here’s an example.
The Queensland land tax threshold for individuals is property valued at $600,000.00. The New South Wales threshold is $822,000.00.
Someone who owns a Queensland investment property worth $610,000.00 and a NSW investment property valued at $830,000.00 currently pays land tax of $600.00 per annum in Queensland and $228.00 per annum in New South Wales.
With the Queensland changes, Queensland land tax will increase from $600.00 to $9,460.00 per annum.
If New South Wales follows Queensland’s lead, New South Wales land tax would increase from $228.00 to $9,888.00 per annum. Our investor’s overall land tax bill has gone from $828.00 to $19,348.00 per annum.
Not many landlords will simply absorb that kind of expense. Rents will go up or the owner may have to sell.
I predict that many future investors in Queensland will avoid the tax by simply setting up a new company or trust in which to buy their Queensland property. After all, they would be crazy to buy in the same name as their interstate property and face massive land tax bills which can be easily avoided.
Buying in a different entity will ensure that their interstate properties are not included in the Queensland land tax threshold.
Thus, the increased land tax will largely hit people who already own interstate property in the same name as their Queensland property. They can of course transfer property to a different entity, but often full transfer duty is payable for this.
The new tax is expected to raise only $20 million per year. How many government employees will be necessary to administer it? It will be interesting to see if the cost of enforcing compliance exceeds the amount raised.
If the Federal government were to take over the right to charge land tax, then there could be a single national threshold and then at least everyone has the benefit of a threshold. But the states will not be giving up the right to land tax unless they are forced to do so.
An alternative to hitting interstate investors would be to spread the load by abolishing or reducing the threshold – but that would catch virtually all property-owners and would lead to across-the-board rent increases and a collapse in property investment.
From now on, anyone who owns interstate property and also owns or is thinking of buying in Queensland needs to take these changes into account. FC Lawyers’ property and conveyancing team are experts in their field and can help with these issues.
Contact our team today to discuss your next property purchase.
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