New Victorian land tax: friend or foe?

Victoria’s new land tax announcement has been quite unpopular in property investment circles. For those who aren’t familiar with the Andrews’ government’s COVID debt recovery plan, here are the details below. This ‘temporary’ tax is due to start from 1 July 2024 and will span ten years. It’s one of a couple of tax changes pinpointed to help solve the debt mess our state has found itself in.

Land tax is levied on all non-principle places of residence, (and there are other exemptions). Currently our land tax rates for individuals are as follows:

Note that trusts are calculated at a different rate; but also affected by the COVID surcharge.

“From 1 January 2024, the tax-free threshold for general land tax rates will be reduced from $300,000 to $50,000.” (Source: Lexology)

What this important change means for lower-valued holdings is that investors who selected their property deliberately for higher rental yield and land tax exemption, (due to being under the dutiable threshold) are now going to receive a land tax bill.

For example, a $500,000 property with a land value of $250,000 would have attracted no land tax. From July next year, this owner will be taxed $975 per year.

A ‘COVID-19 debt temporary surcharge’ will apply in addition to existing land lax:

• a $500 flat fee will apply for taxable landholdings between $50,000 and $100,000
• a fixed fee of $975 will apply to taxable landholdings between $100,000 and $300,000
• for taxable landholdings above $300,000, a $975 fixed surcharge will apply and an increased rate of land tax by 0.10 per cent of the value of the landholdings
• for a trust over $250,000, a flat $975 fee will apply and an increased rate of land tax by 0.10 per cent of the value of the landholdings.

“These changes are estimated to raise $4.74 billion to repay COVID debt over four years and will impact 860,000 taxpayers, with the lower land tax threshold predicted to capture an additional 360,000 new taxpayers of whom have not previously been required to pay land tax.” (Source: Lexology)

“People will smaller landholdings will feel the biggest impact from the threshold drop.”

“For example, under the new changes, the land tax payment for the owner of an applicable property with an unimproved land value of $1 million will rise from $2,975 to $4,650.”

What we cannot ignore is the impact of this on any investor’s desire to get the maximum rental income that they can muster.

Climbing interest rates are not a reason (or excuse) to increase asking rent, and nor is a tax.

But while investors are feeling higher financial pressures, they will be far more likely to keep a close eye on the rent that they are receiving. Maintaining fair market rent is a firmer priority on every investor’s list these days, particularly Victorian investors. Having experienced the harshest COVID lockdowns in the world, and for many, those who received lower or nil rents during the enforced rental eviction moratoriums will be determined to make sure that they are getting fair returns on their investment.

Combined with the chronic rental undersupply issues that are plaguing every state and territory, this tax announcement could initiate some investment property sales.

Unless the property sells to another investor, any investor sales will deplete our shallow rental pool further.

What investors need to ask themselves relates to the net gain or loss their property is likely to exhibit if rents continue to climb at (or above) the current rates.

A $500,000 property, (for example, an apartment in Melbourne) will likely be delivering a weekly rent of around $370 per week. At the current rental increasing rate of 15.6%, this investor’s market rate will enable them to apply a rental increase of just over $60 per week. Annualised, this figure equates to $3,120.

The land tax obligation pales in comparison.

However, the segment of investors who do need to investigate the impact of our land tax changes on their finances are expat and overseas investors. The changes applied for absentee owners are going to be significant.