WARNING! VERY HIGH LAND TAX IN AUSTRALIA - NSW

Reasons Not To Invest in Australian Residential Property (particularly not in NSW)


1. High Transaction Costs:

~5% as buyer (Stamp Duty, Bank costs, fees & valuations, Legals, Inspections)

~5% as seller (Agent, Advertising, Legals, Preparing the property).

That is ~$100,000 transaction costs on a million dollar property. You could get in at $80K but the point is that it is expensive.


2. Land Tax: (VERY HIGH esp in NSW)

1.7% pa on every dollar in land value above $352K in NSW Tax calculated on government valuations that now significantly exceed current values since valuations are based on a trailing average which includes the peak in the market and valuations are not carried out very often. (Remember land tax is payable every year whether you make a profit or not. As a guide, on a property with land value of $800K, land tax in NSW will be approx $7,700 pa). Seeing easy pickings the NSW and some other state governments ramped up land taxes at the top of the boom.


3. Low Rental Yields:

Connected to the weakness in the market is the fact that rental yields are low, around 2.0 to 2.5% (based on Residex data & personal experience) before taking into account management costs, maintenance costs. Ask yourself, in an environment with high rents relative the average wage but with low rental yields, where exactly is capital growth going to come from?


4. Tax Avoidance and Refinancing:

If you do gear up to invest in Australian property, and if by some miracle you make a profit, the only way you can realise any of this profit is to sell the property and incur exorbitant transaction costs. If you attempt to realise any of this “profit” by, say refinancing to draw down the equity, then you will fall foul of Australian’s draconian and severe anti avoidance laws (section IVA). The problem is that by refinancing you will increase your interest costs and thus decrease the tax you pay. In Australia this is considered tax avoidance! If you do this, the fines (and legal costs) are horrendous.


5. Gearing and Risk:

So called investment advisors (mortgage brokers) will tell you to gear up (borrow) to invest in Australian property so that you can offset the interest costs against high taxes. The investment advisors will not mention that you are significantly increasing your risk, just to pay high tax. Borrowing to pay tax, does this sound like a good idea?



6. Market has Peaked:

If you follow a mortgage broker’s “advice” and gear up (borrow) to invest in Australia, remember the property market is at the end of 20 year growth phase. Baby boomers are retiring now and demand for housing is declining as they downsize and reduce spending. (Does this sound like a market about to take off?)


7. High Interest Rates:

Australia has relatively high interest rates, so if you borrow in Australia you will be paying over 7% in interest costs, while getting around 2% to 2.5% net rental yield and looking at capital depreciation as the baby boomers retire and the economy comes off a 20 year growth phase.


8. High Maintenance Costs (GST and Taxes):

Maintenance and management costs in Australia are very high since they incorporate high taxes and GST (Goods and Services Tax). The GST is 10% on all services including maintenance costs, management fees and any capital items. The cost of labour (electricians, plumbers etc) is very high due the past building boom when these trades had more work than they could poke a stick at. The high income tax in Australia feeds through into the prices these trades charge, since half of what you pay them goes in taxes.

WARNING!!! WARNING!!!


BAD ADVICE ABOVE!


Peter B1


AGAIN!!...THIS IS OLD GROUND... SEE BELOW POSTS THAT COVERED IT AGES AGO...


Possibly PeterB1 is the same guy as Matt2006???




I'm not sure if you have thought about it before posting!


Did you inherit the property? because its not a "NEW" tax.


EXPERIENCED INVESTORS WOULD NOT MAKE COMMENTS LIKE YOURS


Successful investors in Australia (as anywhere) would factor all outgoings into their original calucalations when purchasing property for investment.


There are a few questions you should be asking yourself at this stage in your investment career:


1. How much of a capital gain have you had on the property since you took ownership(or family first owned the property)? and how long do you intend to hold the property?


In Sydney apart from the last 2 years you would most likely have had exponetial capital growth and if you continue to hold your property long term im certain you will again have significant capital growth.


Does it mean because there is a land tax in NSW that you have made a poor investment? No! I would suggest on the contrary you are not likely to sell even with the Land Tax you complain about! Because you KNOW its a good investment anyway!


2. What loan ratio do you have? if any? you should have at least 70% for your investment property to gain the maximum tax benefits whilst you remain overseas. Many people actually return to Australia tax free for a considerable time if they structure their property investments correctly. Obviously from your post above you are extremely adverse to taking a loan! Get with the program… even Li Ka-Shing gears his property investments! Gear it to the highest level you feel comfortable with.


3. If you are worrying about Land Tax you obviously have not structured your Australian investment portfolio correctly. Either you have too much property in NSW and have not diversified your portfolio into other states or you have one very large asset in NSW. Which I suspect is the case. Oh poor you!


Land Tax in NSW does not kick in until you have over A$350,000 (HK$2,065,000) in Actual land value, and even up to A$500,000 (HK$2,950,000) land tax is only A$2,616 per annum.


Most likely from your message above you have one property high in land and capital value.


Therefore: Lets say annualised average capital growth of 7% (conservative based on historical figures over the last 30 years and factoring you will most likely hold until the next upswing in Sydney) on a property 1M(A$500K land + A$500 building = 1M) you are making A$70,000 in the first year alone! and remeber this is compounding also! so a relatively small land tax bill which every good investor factors into there cost base is not too onerous in my books.


The above, (3.) does not even take take into account any gearing which would significantly increase your ROI (and Cumulative Tax benefits)


4. Finally, i think you need to take some professional advice because i'm certain you have not thought it through thoroughly.


Land tax in Australia and in NSW in particular should not be a deterrent to investing in quality property its just a by-product of being a successful investor.




This is a further post on the subject covered months ago!


I don’t think he gets the whole point of investing...see below...more likely this was previously PeterB1’s (are you the same person? As Matt2006) own home! which should have a whole set of different rules to an investment property!.


Why else would you continue to spruke to others and I quote; "WARNING - DON'T BUY PROPERTY IN NSW AUSTRALIA!!"


I have looked into this issue a little further and am still convinced PeterB1 or Matt07 has made a very tidy profit on his NSW investment (or family HOME) despite what he says about land taxes! No burnt fingers for PeterB1and Matt07 more like cats in the cream! And they don’t know it yet!.


Last 10 years average capital growth in Sydney to Dec 2005 10.01% per annum even including the last couple of years of slow or slightly negative growth. Handsome growth in anyone’s terms not even factoring the “huge risk” of gearing. Ask Li Ka Shing if he gears?


YES property works in cycles! Some longer than others but if you hold long term good property will invariably do quite OK… otherwise no one would invest in property!


If you think its that bad why not get out and put your money elsewhere?? Because surely upon your return from overseas and based on your rational above you would have more purchasing power with a “Less taxed investment”


You noted that your ownership predates the changes and you’re annoyed at the removal of the 6 year expat exemption! Which means you have owned the property for a number of years…and I’m guessing but it was most likely your principle place of residence prior to moving overseas. Because If it was pure investment the 6 year expat exemption would never have applied anyway. (I'm sure you took that into consideration didn't you?)


OK lets move on


Take for example Matt07’s original post where he says; “ Land tax takes around a third of the rental yield on property in NSW Australia”


NOW do a quick calculation:


Land Tax is not applicable in NSW until you own over A$350,000 worth of land therefore its zero up until then. Are you with us Matt07??? Or PeterB1 whoever you are?


Then if we take an average rental Yield in NSW… of 3.5% gross on a 1M property = $35,000 YES yield is not as high as other states in Australia but rents are now on the rise!!! In Luxury property yields may be slightly less that average investor stick.


If land Tax was a third of the rental Yield it would be $11,500 per annum (based on a third of the rental yield). Now we know land tax is not that much on a 1M $ property!!!!!! Don’t we Matt07???? Or PeterB1


On a 1M Dollar property in NSW even if you have undercapitalised on the land by building a very cheap house or possibly its very old and small for the land…lets Say the land value is 600,000 on the land which means the house is only worth 400,000 i.e. undercapitalised.


Land tax is $4,316 per annum WOOOPIE DOOOO!!!!! Big deal!!! You probably pay more in cab and public transport fares every six months here in HK.


Either that or your rental yield is unbelievably low at 1.3%....somehow I don’t think so!


Ok… and lets not even get into the issue of gearing and risk analysis or “risk adjustment” because Matt07 or PeterB1 you obviously don’t understand that leverage even at lower levels than suggested earlier help maximise ROI. Is 50% LVR too high for you?


If we were to take your advice we would pay cash for everything now there’s an opportunity lost if I ever saw one.


I could even guess that you have a PI loan on the property? Instead of IO?.


And no where have you mentioned the benefits available to you whilst you are overseas! from Australia and your Australian property. i.e. the many tax deductions because you own property in Australia which are cumulative whilst you remain overseas… these cumulative tax benefits can be very attractive!


I for one will not be paying income tax or capital gains tax upon my return on any of my properties for many years to come.


Tax savings in Australia is not the reason I invest in Australia but an added bonus.


Good Luck I’ll keep investing in Australian Property… and if its good quality property definitely in NSW. Probably not a bad time to buy over the 6 -18 months.


Cheers

I generally agree with the first poster.


Frankly, OPO sounds like someone that makes their money from convincing people to buy Austrlian property.


My advice is don't listen to OPO but get real and

absolutely independent financial advice. That means from someone who does not have a vested interest in selling you on this idea.

MMM...marymr2


I have to disagree with you!...


I think OPO generally got it right... i have quite a few investment properties in SYDNEY NSW...


Although yes I do have to pay land tax, its because I have a large enough investment in the state.


I'm very happy with the long term growth and prospects which far outwiegh any land very minor land tax.


I will definitely not be selling any of my properties in NSW because of it.


It Seems to me the first poster is not very experienced!!! as OPO hinted at.


I'm looking to buy another one shortly because I believe its a GOOD TIME TO BUY.


By the way can you recommend anyone who you say can provide absolutely independant advice??? I would like to know?


I hope your no going to say a financial planner!!!

All the above IDs are new to this forum. Why not reply with you real IDs.

I have not logged in for a while, but I see

that Peter has taken up my initial comments

on land tax. He seems to have summed it

up very well.


I would like to add a couple of things:


Unsaleable/Unrentable Properties in range < $400K

I have been following the market and have read reports that properties in the below $400K range

in some suburbs in Sydney are standing vacant

and cannot be sold either. Such was the extent

of overbuilding during the last boom.


Rental Crisis

This is largely a beat up. The renatal market is

only very slightly tighter, in premium suburbs

like Bondi.


Beware of False Assumptions

For example one of the posters above is inconsistent. On one hand he says returns on

property have been "extraordinary" over the last

20 years. On the other, he says future growth

assumptions are "conservative" because they

are based on past returns. (But those returns

were "extraordinary" so not "conservative" at

all.)


Disclose Hidden Fees and Commissions

If you are going to borrow to buy in Aus, you

should get the mortgage broker to disclose

all (hidden) commissions and fees. Though this

could be problematic.


No Change in State Gov at recent election.

So no changes on Land Tax the horizon.


One last thing this dialogue should probably

get moved to the Property thread.