Land Tax- Article in the Sunday Telegraph

This is an article from the Sydney Sunday Telegraph, April 13 2003.

I'd normally post a link- but I could not find the article on their site, so I've scanned the article:


FOR RICHER OR POORER

Everyone, it seems, is being squeezed by land tax - even renters - in fact, recent skyrocketing house values and subsequent land tax bills have left many owners wondering if property is such a safe investment after all. Jeremy Bass investigates.

Have you owned residential property in Sydney for a few years? If so, you're doubtless a lot richer, on paper at least, than you were when you bought it.

And thanks to you and all the people clamouring to buy your property, so is the State Government. With the dramatic rises in demand for residential property in Sydney, and all along the NSW coast, have come dramatic hikes in prices.

And those hikes have created a bracket-creep problem, shunting mum-and-dad landholders over the land and premium property tax thresholds, often saddling them with a debt way beyond their means.

WHO NEEDS TO KNOW?

So who is affected by land tax? For a start, there are small investors with negatively geared urban units and coastal holiday houses. Even renters are feeling the effects, according to the Real Estate Institute of NSW

Then there are long-term residents of areas such as Sydney's eastern suburbs and lower north shore, whose property values have risen far beyond their wildest dreams and what they'd be able to afford today.

The first type of tax affects those with investment properties sitting on land with an unimproved value of $261,000 or more (see main box).

Most of the attention so far has gone to people affected by this tax. In Sydney and coastal surrounds, that's a lot of people, given that there's hardly a parcel of land worth less than that.

Many such properties are negatively geared to take advantage of tax breaks and capital appreciation. Sharp price hikes produce problems with them, says Michael Stevens, manager of tax and legal services at PricewaterhouseCoopers. "Negative gearing is usually finely tuned, so unexpected increases in land tax could force investors to sell their properties," he says.

So the fallout can produce a ripple effect across the investment market.

Then there's premium property tax, which you pay on the home you live in, but only if it has an unimproved worth (the value of the land without the house) of $1.68 million. Only the top 0.2 per cent of properties are affected, understandably so, because even with the huge hike in house and land prices in recent years, there aren't too many of us sitting on a property with such a value

MAKING IT FAIR

After recent events in the courts, the number of homeowners affected by premium property tax will likely get smaller. For this, we can thank one Anthony Maurici, the owner of a stretch of waterfrontage in Hunters Hill worth, according to the Valuer-General back in 1998, $2.44 million.

Maurici objected to this amount, claiming a value of about half that. Valuation methods based on sales of vacant land in a premium area where that type of land was so scarce were patently unfair, he argued.

Then, on appeal, the, Land and Environment Court devalued it to $1.95 million. Not satisfied, Maurici appealed through the Supreme Court, which rejected his case outright. By February this year he was in the High Court. They ruled five to nil in his favour, finding that such valuation methods were flawed.

The State Government is stressing that this is a one-off and there's no precedent here. Others beg to differ.

"It's a High Court ruling. Not only does it set a precedent, but it sets it across the country," says Grant Jackson, the director of property strategists M3 Property. "The High Court basically ruled that scarce land sales in established areas can't be used for valuation without some method of adjustment to reflect the premium paid for their scarcity."

Like what kind of adjustment? "Well, they ruled that sales figures from farther afield should be brought in. They also said some analysis of improved-land sales should be included, and in a way that's not limited to scarce sales."

Plenty of people are pressing for the abolition of premium property taxes. Stevens suggests: "There should be some mechanism to waive for those people who've owned their place for decades, or at least limit the tax to two to three years without the addition of interest."

"If the owners can't pay and defer for some time, it can place an awful burden on their beneficiaries."

CAUGHT IN THE NET

The Liberals are saying they would abolish this tax. But it's not likely to be a high priority, given that so many of those subject to it reside in state blue-ribbon Liberal seats.

Land tax is coming under attack on other fronts, too. Witness Morrie and Beryl Manson, a couple in their mid-'70s, who retired in 1990 to the house they'd bought in Currarong on the south coast 10 years before.

They inherited the property next door after caring for the owner for the last few years of her life.

The couple's problem was their prescience. People selling out of Sydney at inflated prices have brought inflated prices with them, forcing prices - and hence property values - in places like Currarong into the stratosphere.

The Mansons have seen the value of their properties treble to almost $500,000 each. But their income remains at less than $20,000 a year, leaving them ill equipped to pay the more than $12,500 land tax they owe on their windfall.

Done out of their superannuation by a dubious financial planner in 1993, they're dependent on the house next door and the place they left behind in Sydney's west for their income.

The couple are fighting the Office of State Revenue, using antidiscrimination laws in relation to their ability to pay.

"I've read my way through the Act - 50 odd pages of it - and nowhere does it address the issue of ability to pay," explains Mr Manson. "I couldn't find a single mention."

They're working with other residents - he says plenty of others in Currarong alone have been affected similarly - including a legal academic.

It appears the valuation methods are flawed, too. Manson's research of local sale prices shows four properties sold in their street in the past three years.

It appears their property has been valued at about 33 per cent over the average improved land value based on those sales.

"So we're coming at it from a couple of angles. But the main one's simple: we simply can't afford to pay, and that's that," he says.

Renters, too, are feeling pain. The Real Estate Institute NSW (REI) points out how the tax takes its toll on the rental market. It claims that in some areas, up to 38 per cent of rent is paying for land tax.

"That's very much at the high end of the market, in places such as Bellevue Hill," says REI NSW president Chris Fitzpatrick.

"But there's no doubt it's having an impact everywhere."

In Bankstown, for example, a representative land value of $288,000 attracts a weekly land tax bill of$10.75. That's about 3.3 per cent of the $330 median rental figure.

"That's about $500 a year, and there are plenty of strugglers in Bankstown who could certainly find something to do with that money."

Drummoyne offers a mid-range example. Here, the average block, worth $458,000, costs $66.33 a week in land tax. That's about 12.2 per cent of the area's $545 median rent.

The State Government is doing well out of it all, Fitzpatrick says.

Sydney's taking in 30,000 people a year, he adds, and much of that's driven by policy.

"So they're driving up demand, which drives up prices, then they're reaping the windfall."

LOOKING AHEAD

The REI is now calling for the immediate abolition of the premium property tax and for an immediate rise in the normal land tax threshold to $500,000, with a view to total phase-out by the end of the decade.

"That's how long it'll take for the states to replace it by absorbing the, full benefit of the GST intake," Fitzpatrick says. He adds we've now reached the point in Sydney where suburbs such as Marrickville, Leichliardt and Revesby are bracket creeping over the threshold.,

And that was unheard of until recently. "Those suburbs are full of people who can't afford to pay it, and the tax was never intended to capture them."
 
geoff,

very good point to raise by posting this article!

another point related to land taxes is calculating the true net return on investment. i actually wonder what proportion of all property investors know exactly what their costs are?

a few people i spoke to don't even account for some or all of the following: land taxes, inflation, vacancy costs, their tax bracket, time cost of managing/maintaining, true buy/sell costs (with taxes as main chunk) etc.
 
quoting D.Gore of NSW Property Owners Association:

"...the government will collect almost a billion dollars in land taxes this year.." (he's referring to 2002)...."but of that, a very small part is "premium tax"....the real big land-tax issue is the general tax that most of us have bben paying for years........"

i guess the government doesn't see the importance of balance and interdependence of rents and land taxes. less and less accommodation is provided by government to low-income earners who increasingly rent from private landlords.

i support this view: if land taxes take a big chunk of rental income and it can't be fully passed onto tenants by increasing rents, we'll see many resi property investors exiting the market seeking higher returns in other investment vehicles..........

any opinions?
 
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