Land Tax Strategies

[jon2378]

So i'm currently considering purchasing a heritage listed property on a large block of land, which can't be subdivided. The numbers look good however I discovered that land tax would be approx $11,000 per year.

I would like to buy it as an IP, leasing to a family member. Tax deductability is foremost, however at the same time I can't really justify 11k per year in land tax costs.

Is there a way I could structure the purchase among family members (or trust funds/legal agreements?), so that I could somehow retain tax deductability, while not being liable for land tax?

E.g. something like lending the money (say 1.5mil) as a commercial loan to a family member, who then uses the 1.5mil to purchase it as their PPOR. (However this won't work as the commercial rate has to be > the rate borrowed at, and therefore I could still not take advantage of tax deductability, as I would be making a profit)
However, it also raises issues of asset protection.

Equity is not an issue for the parties involved, with no debt and a substantial portfolio to borrow against. What structures should I be looking into to make this purchase feasible?

I am located in SA.

 

[Paul@PFI]

Land tax is tax deductible...It a normal outgoing for income producing property and rather difficult to bypass. If its a PPOR then the deductibility fails. Its a simple anti-avoidance law.

A related party at non-arms length rates could also trigger some tax concerns. Land tax should normally be a cost/factor to consider when determining if a property should be acquired.

Simple avoidance strategy means not buying ??

 

[jon2378]

I think land tax is important, as it acts as a deterant from people buying up large quantites of land for future development potential.

However in the case of a heritage listed property, where no development potential exists, however it has a substantial land holding, I don't think it's justifiable to pay a large amount of land tax. It's essentially limiting these proprties to be PPORs as the numbers would never stack up to make a IP justifiable.

Purchasing the property in a unit trust, with say 4 parties each owning 25% (~250k land value each), each party would be below the $316k threshold for land tax, and therefore no land tax would be applicable, but tax deductability would still apply? Are there any flaws with this?

 

[RPI]

Very different between states. The method Jon 2378 suggested would not work in Qld, you would need separate trusts.

 

[Aaron_C]

It's essentially limiting these proprties to be PPORs as the numbers would never stack up to make a IP justifiable.

Then don't buy it...

 

[Terry_w]

I am located in SA.

This doesn't matter - it is where the property is located that is important.

The only way you could get a deduction yet not own the land would be to have a fixed unit trust own it and you borrow to buy the units. I don't know off the top of my head how this would be treated for land tax in SA though.

Another option may be to use a company to own it - but you wouldn't get a deduction for anything as your are not the owner.

 

[Paul@PFI]

Very different between states. The method Jon 2378 suggested would not work in Qld, you would need separate trusts.

It "can" work in SA. Different, but can work. Terry mentioned the UT. Yeah works BUT the way SA land tax works might not save a lot. Can never be a residence that way.

One major issue I have seen is overvalued heritage land. They overvalue the land because of its heritage yet its meant to be based on unimproved value. yet they value it based on adjoining land without the heritage aspects. Its also possible the land has NO value if the heritage restrictions of the site are onerous. Its not like you can demo and sell is it ?? This arguement worked on two sites I have seen (none in SA) - One a major well known Australian landmark site. Land owner really owns everything that exists an atom above the land. The land itself they just posses the title to all above the land. You cant change it, dig it, demo it, excavate etc ???? land tax value is negligible perhaps?

Check your land tax rules and rulings and how they address this valuation concern and fight it.

 

[Paul@PFI]

Another option may be to use a company to own it - but you wouldn't get a deduction for anything as your are not the owner.

You can negative gear company shares in a property owning company though IF company intendes to turn a profit and pay dividends. Hard to see that with neg gearing. (Fail)
And no CGT discount
And problems with losses quarantined in the Co
And problems if there is a profit - Tax rates, dividends etc
Stamp Duty issues on shareholding changes ???(Unsure of SA Duties Act)
Living in it can give rise to a fringe benefit tax problem....

Company ownership of property is a rare event. Anyone contemplating it needs to get very sound advice.

 

[jon2378]

Well, how are big investors avoiding paying land tax? In SA, land tax is 3.7% once you reach 1mil+ of land value.

That means a property has to be returning at least 5%(interest rate)+2%(costs)+3.7% (land tax) = 10.7% annually, just to be neutrally geared!

How could investors have 10+ properties??? Or do they all eventually create companies to do this and therefore avoid land tax?

 

[Terry_w]

Well, how are big investors avoiding paying land tax? In SA, land tax is 3.7% once you reach 1mil+ of land value.

That means a property has to be returning at least 5%(interest rate)+2%(costs)+3.7% (land tax) = 10.7% annually, just to be neutrally geared!

How could investors have 10+ properties??? Or do they all eventually create companies to do this and therefore avoid land tax?

Its enough to make you want to invest in shares.

Ultmately land tax is a cost of doing business and can/t be avoided. Creating companies won't help you avoid land tax, but only postpone it - I am sure that related companies would be treated as same companies and land holdings aggregated for land tax purposes (as in NSW)

Keep in mind it is levied on the land value and not the tota value of the property

 

[Paul@PFI]

Well, how are big investors avoiding paying land tax? In SA, land tax is 3.7% once you reach 1mil+ of land value.

That means a property has to be returning at least 5%(interest rate)+2%(costs)+3.7% (land tax) = 10.7% annually, just to be neutrally geared!

How could investors have 10+ properties??? Or do they all eventually create companies to do this and therefore avoid land tax?

You are looking at land tax as an income tax. Its not based on income it is a wealth tax. GST would have to be 15% + to even get close to removing it. Then there would be social chaos with flipping out of control. Land Tx assumes the property value has and will appreciate. Its the Govts cut. Problem is it comes from annual cashflow and yes it is a yield destroyer. I have many very long term property accumulators and its their biggest problem...Cashflow doesnt pay land tax. Its not uncommon that little old lady ends up with 10 props and the land tax is crippling. Sucks all the net rental income.

Problem definately affects those who heavily gear on IO basis with multiple IPs much much worse than those who repay loans etc.

Companies. No. Never. Some states allow each trust a threshold. Multiple trusts works...The Trustee company is on title but trust owns it. Many rules however.

Strategies _
1. Know thersholds and "work them"...
2. IPs in other states. There is no grouping (thank god)
3. Multiple entities if relevant state permits thresholds on that basis (ie SMSF + Personal)
4. Low land value IPs (suburbs + also units)