Stamp duty and land tax on rental property

When a taxpayer purchases a rental property, she/he will incur various “transaction taxes”. The precise nature and level of these transaction taxes will depend on the state or territory in which the property is situated.

 

Land tax

Land tax is an annual levy imposed on “wealth” in the form of land. Land tax is levied in all states and the ACT on the unimproved value of taxable land. Each state and territory provides various reductions, exemptions and thresholds. For example, in NSW exemptions include the family home including owner-occupied strata title units, land used for primary production and land used for certain charitable purposes. Landlords who provide certain low cost tenancy or lodging may claim an exemption from land tax provided certain thresholds and conditions are met. Requirements for this in the 2017 income year are outlined in Revenue Ruling LT 100 (boarding houses) and LT 101 (low cost rental accommodation).
The rate of land tax varies from state to state. See ¶560-500 in relation to deductibility of land tax.
From 1 January 2017, a land tax surcharge of 0.75% of the average unimproved value over a rolling three-year period applies to [the portion of] residential land owned by a foreign person at midnight on 31 December each year. The surcharge is applicable irrespective of whether the property is subject to primary duty, ie a residential property may not be subject to land tax, for example if it is used and occupied as a principal place of residence and has a value below the relevant threshold, but still subject to land tax surcharge when it is owned by a foreign person.
The rate of land tax surcharge increase to 2% for the 2018 tax year.
From 1 July 2016, the vendor of any land transferred in NSW is required to apply for a Land Tax Clearance Certificate from the OSR, which states whether there is any land tax owing on the property.

 

Stamp duty surcharge for foreign purchasers

Stamp duty surcharge applies for foreign purchasers of residential real estate. This table details the definition of a foreign purchaser for each state, as well as the new rules that apply to the transfer.

 

State Definition of foreign purchaser Surcharge/new rule
VIC Non-visa holder 7% stamp duty surcharge on regular rates from 1 July 2016 (3% from 1 July 2015)
Temporary visa holder No exemptions are available (including off-the-plan deferral, deceased estates and relationship breakdowns)
Applies from 1 July 2015
NSW Non-visa holder 8% stamp duty surcharge on regular rates from 1 July 2017 (4% from 21 June 2016)
Temporary visa holder No deferral for off-the-plan
Permanent visa holders who have not resided in Australia for 200 days or more in the previous year Applies from 21 June 2016
QLD Non-visa holder 3% stamp duty surcharge on regular rates
Temporary visa holder No concession for first homes and family business
Applies from 1 October 2016

 

Stamp duty

One of the more significant transaction costs associated with purchasing a property is “stamp duty”. Although stamp duty originated as a government levy on the creation of legally binding documents, the tax has evolved, and continues to evolve, into a broad-based tax on “transactions”. This is particularly so in New South Wales.
Stamp duty is imposed on the transfer of ownership in the real property (often referred to as “conveyance duty”).
In the past stamp duty may also be imposed on the creation of a mortgage over the property as security for finance (often referred to as “mortgage duty”). As at 1 June 2011, mortgage duty has been abolished in all states and territories in Australia except for New South Wales, which abolished mortgage duty on commercial property finance from 1 July 2016. See further AMTG ¶37-050.
Stamp duty on the rental part of ordinary leases has been abolished in all states and territories in Australia. However, stamp duty may still be levied on certain leases and premiums paid.
The rates of stamp duty on the transfer of real property vary from state to state, and are commonly levied on a progressive scale. Each jurisdiction also provides various reductions and exemptions.
Stamp duty paid on the transfer of a property will form part of the property’s cost base for the purposes of CGT (¶560-720). Any stamp duty paid on a mortgage may be deductible as an “initial borrowing expense” under s 25-25 (¶560-320).

 

“Land-rich” or land holder companies and trusts

Duty on the transfer of either shares in an unlisted company or units in a trust has not been applicable since 30 June 2010 in all states and territories, except South Australia where it was abolished from 18 June 2015 and New South Wales where it no longer applies from 1 July 2016.
However, stamp duty cannot generally be minimised by transferring shares or units in a property-holding company or trust, as opposed to transferring the underlying property. The rules applying in each state and territory vary, but most jurisdictions define “land-rich” companies and trusts as those which:
• are entitled to land with an unencumbered value of at least $2m, and
• have at least 60% of the value of all their assets invested in real property.
In some states and territories the “land-rich” duty provisions have been replace with “land holder” duty which are substantively similar. However, in New South Wales an entity will be land rich if there is land of $2m or more. The second limb is not required to be satisfied to impose land rich duty. See further AMTG ¶37-030.

 

Foreign purchasers

Absentee owners (and all foreign owners in NSW) are subject to a surcharge on land tax at the taxing date. The following table outlines the rules:

State Definition of absentee/foreign owner Surcharge/new rule
VIC Non-visa holders and temporary visa holders who do not ordinarily reside in Australia and are either absent from Australia on 31 December or absent for more than six of the previous 12 months 1.5% land tax surcharge on all land, starting at $250,000 (tax-free threshold). Applies from 1 January 2017
NSW Non-visa holders 0.75% land tax surcharge on land that has a residential dwelling, starting at $0 (no tax-free threshold). No principal place of residence exemption. Applies from 1 January 2017
Temporary visa holders
Permanent visa holders who have not resided in Australia for 200 or more days in the past year
QLD Anyone who does not ordinarily reside in Australia on 31 December, or has not ordinarily resided in Australia for more than six of the previous 12 months Land tax is imposed at company or trustee rates (reduced threshold). In place since 1 January 2011

For all states and taxes tabled above, a New Zealand citizen who holds a special category visa within s 32 Migration Act 1958 (Cth) is taken to be a permanent visa holder. Any surcharges would generally not apply.

 

The source of this content is CCH‘s professional information services. Thompsons Australia has a professional subscription with CCH providing access to in-depth quality technical information and commentary used by Thompsons Australia in keeping staff and clients currently in formed.

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