VERY HIGH LAND TAX - NSW AUSTRALIA

WARNING - DON'T BUY PROPERTY IN NSW AUSTRALIA!!


Australia has very high taxes on income from property but I was shocked that one state

where I own a property New South Wales (NSW)

has recently added another tax on property

i.e. LAND TAX. This LAND TAX applies to everyone including expats who have left a home

in NSW.


Land tax takes around a third of the rental

yield on property in NSW Australia. This is

on top of income tax on the property!


If you are an expat in Hong Kong and you rent

out your property, then after all the taxes

they take you get almost nothing back.



If the property you are renting is not your own

home or you are not an expat there are additional

capital gains taxes when you sell the property.


Some property investment advisors say you should

borrow to invest in Australia, since the cost of

the borrowings can be deducted from the returns.

But this is no great benefit when nationwide

income tax and then on top of that NSW state

LAND TAX takes most of the return on any

investment. So what if everything is deductible

but there is no return on your investment.


Just a warning to anyone thinking of investing in

NSW Australia - DON'T!!


Matt

i agree that Land Tax is something that investors should seriously factor into their decisons. All Australia states impose the same tax although there are different thresholds and exemptions. Incidentally, its not ne - the current NSW Law was enacted in 1956 - the previous - 1845

Remember that if property is negatively geared all the tax credits you receive can be stored and used at a later date when you are back in Australia. A huge benefit.

WARNING!!! WARNING!!!


BAD ADVICE ABOVE!


Matt 2006,


This is actually a very funny post! I'm not sure if you have thought about it before posting!


Did you inherit the property? because as sydexpat mentioned above its not a "NEW" tax.


EXPERIENCED INVESTORS WOULD NOT MAKE COMMENTS LIKE YOURS


Successful investors in Australia(as anywhere) would factor all outgoings into 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.


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 diverified your portfolio into other states or you have one very large asset in NSW.


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 anualised avarage 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 to 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, Matt 2006, 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.


cheers and good luck!

The only hope for NSW property prices is to reduce land taxes. Take the pain now and lobby the opposition to support reductions in property taxes. Pretending land tax is not a problem in NSW makes it more likely they will not be changed. Investors and the public need to be aware of this tax issue.


> i agree that Land Tax is something that investors should seriously factor into their decisons.

> All Australia states impose the same tax although there are different thresholds

> and exemptions. Incidentally, its not ne - the current NSW Law was enacted in 1956 –

> the previous - 1845

The land tax threshold and rates were changed in NSW a few years ago. The exemptions were also changed a few years ago. All of these changes increased tax rates. Just look up the amendments to the legislation.


The effect of these tax changes are that NSW now has the highest land tax in Australia. These taxes have a significant detrimental effect on the achievable yield. While these taxes are in place NSW property will remain relatively poor value.


One other key change is that expats can no longer have a 6 year land tax break on their primary residence.


Anyone thinking of investing in NSW needs to ask a simple question.

Consider two different assets that are identical in all respects except that on one asset you have to pay higher taxes (e.g. NSW). i.e. Both assets have the same risk. Now you can choose any gearing you like, and so change your risk profile. Obviously you choose the asset with the least tax.


Most of the rest of your email attacks the person and does not address the issue of high taxes in NSW. You are basing your arguments on emotion rather than facts, so I guess you might be in sales and perhaps have some exposure to the NSW property market.


A “smart” investor should not be persuaded by emotional arguments. (irony )


The fact is that while NSW property taxes remain high, NSW property will struggle. In addition the stage in the cycle and the change in demographic pressures and interest rates all look bad for NSW in the medium term.


> 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.


Your comment here reveals your financial naivety. You are claiming that past performance is a good indicator of future performance. In fact this is not the case and particularly so for residential property prices which are sensitive to broad demographic changes.


At best the future for next couple of years is for gradually decreasing vacancy rate, giving increasing

support to existing prices (which are 10% off the peak). These increases in rents (along with oil) will most likely feed through to inflation and increasing interest rates. In other words not a great investment environment for the medium term.


> 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!


I would like to exit this market perhaps after a change of state government and after rents have increased in response to less building activity. A new liberal government might see the benefits of reducing taxes on property. Overall I am bearish for the long term prospects.


> 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.


Again this is naïve. By gearing up you are significantly increasing your risk exposure to “reduce” tax. This tax distortion to your investment decision changes the risk profile of the investment. However no matter whether you make money or not you are going to have to pay the land tax.


In addition it is not possible for an expat leaving Australia to regear their property because this is

deemed tax avoidance under section iva. Also anyone buying in Australia should be aware they cannot simply restructure loans to reduce tax, in other words section iva makes investing in Australia inflexible and risky from a tax point of view.


It makes little sense to invest into an asset(s) in an environment that is high tax, high cost, low yield and as you say at the top of the market.


> Therefore: Lets say anualised avarage 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 to onerous in my books.


Your assumption of 7% capital growth is the problem. You say based on conservative

historical figures over thirty years. However the past thirty years have been exceptional and

therefore are not relevant for predicting future growth. Over the last thirty years we have

had the baby boomers and immigration leading to increasing home creation rates. This in turn

leads to significant increase in economic activity i.e. via builders, suppliers of home and building

products, etc.


> The above, (3.) does not even take take into account any gearing which would significantly

> increase your ROI (and Cumulative Tax benefits)


And change the risk profile of the investment.

Let me ask you: If you could invest in two different assets that are identical in all respects except that on one asset you have to pay higher taxes. i.e. Both assets have the same risk and you can choose any gearing you like (and so change your risk profile). Obviously you choose the asset with the least tax.


> 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 sales type pitch. But the reality is that tax needs to be factored into investment decisions and high tax makes it more difficult to justify investing in NSW.


I pity those investors in Australia whose investment decisions are so distorted by tax that they gear to 70% and then buy dross properties to reduce their land tax bill. These are the properties most likely to do very badly in the medium to long term.


The only hope for NSW property prices is to reduce land taxes. Take the pain now and lobby the opposition to support reductions in property taxes. Pretending land tax is not a problem in NSW makes it more likely they will not be changed. Investors and the public need to be aware of this tax issue.



Cheers and Good Luck :-)

There are a few other things I forgot to mention.


Australia has a GST, so all your property management costs will attract a GST. The thing

about GST is that like land tax, even if you do

not make a single cent on the investment you

will still pay all of the GST, i.e. 10% on

the management costs.


The other thing to consider is that property

management costs are very high because apart

from the GST, there are numerous other hidden

taxes built into the fee.


For example Commonwealth taxes for both the company managing your property and the the people that company employs.


The company tax is arounf 30% and the top

marginal rate for employees is approx 47%.

But on top of this ordinary workers also pay 10% GST on nearly everything they buy, and on top

of this there are import duties and high local

government rates, as well as a user pays for

roads, public transport, health etc.


In other words if you buy property in NSW and

gear up to do so, you will find that almost

every cent you make on the property will be

absorbed either directly or indirectly through

a myriad of visible and invisible taxes.

These taxes go to sustain bloated local

governments, state governments and the

federal government. (Australia supports

(in luxury) more politicians and public

servants per head than any other country

in the world.)


Then suppose one day you decide you would like

to withdraw some cash from your investment by

restructuring the loan, BEWARE. Because restructuring this way will most likely be

construed as tax avoidance under section iva of

the Tax Act because it will slightly reduce your

whopping tax bill. You might have to go to

court and argue (at huge cost) against a tax

department with effectively bottomless pockets.

The law with respect to section iva is very

uncertain no matter what your QC tells you.


Frankly, you probably have to be crazy to invest

in Australia, but to invest in NSW you would

also have to be a masochist!


So Cheers and Good Luck! ;-)

But isn't that the whole point of investing? Like 'helpful01' says, wherever you are investing and whatever you are investing in if you do your sums beforehand you will know all of the taxes etc. It's the net appreciation you should be looking at, not the gross. There's no point sounding off about NSW land taxes, or Papua New Guinea estate duties or whatever. Taxes are a (necessary?) fact of life and whoever invests without finding out all about the 'negative aspects' deserves to end up with burnt fingers. Very little chance such investors will come to a site like this for the pre-investment information either!

Yes I agree before investing do your research

don't just listen to people with a vested

interest in getting you to invest. I have just

told the other side of the story.


I agree anyone who does not do their research

deserves to have their fingers burnt.

(BTW I am not in that situation since my

exposure to the NSW property market is

predates these changes. I am just

annoyed at all the (new) taxes on property in

NSW and the removal of the expat 6 year

land tax exemption.)


You say net return not gross return is

important, but as mentioned before increasing

net return by gearing up comes at the "hidden" cost of extra risk. If you have two investment

options of equal risk, and all other things

equal, the one with the higher gross return

will be the best investment. So gross

return is important. In other words you have

to "risk adjust" the net return to compare apples

with apples. Once you do this the net return

on a geared inestment looks is far less

attractive.


Yes of course taxes are necessary, but there

are a lot of hidden taxes and traps for

investors in Australia and NSW in particular.

e.g. landtax, GST on mangement and

maintenance costs as well as tax laws that

make restructuring very risky (not to mention

all the usual taxes on any actual profit you

might make). One other thing is that landtax and GST will be payable whether you make a profit

or not.

TC.... seems Matt07 is the one with the vested interest here!!


And I don’t think he gets the whole point of investing...see below...more likely previously his 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 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 Matt07 more like cats in the cream! And he doesn’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???


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!!!


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????


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 you obviously don’t understand that leverage even at lower levels than I 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 12 -18 months.


Cheers