Question Mark

It’s a case of good news for the few and no news for the many, following the Victorian Government’s announcement of land tax cuts in yesterday’s state budget.

Investors with significant land holdings will be considerably better off. In a nutshell, land tax rates for individual investors holding more than $900,000 worth of land will be cut by up to 20% from July 1, 2006.

Very few investors hold individual blocks of land worth more than $900,000, so those set to benefit most from yesterday’s announcement are investors with multiple investment properties. The Victorian Government “groups” individual land holdings together for the purposes of calculating land tax liability, and levies the tax on a sliding scale.

For example, if an investor owns four investment properties worth $500,000 each, they will pay land tax on a combined land value of $2 million. Their current top land tax rate is 2.25% of $2 million. This equates to a land tax liability of $20,580. After July this year, they will pay a top rate of 1.8% '” a reduction of 20%. This will leave a land tax liability of $17,760 '” a saving of $2820.

For those with land holdings worth less than $900,000 '” and according to the Bureau of Statistics, that’s more than 75% of individual investors '” the budget delivers no land tax relief.

An investor who owns a median-priced house in Melbourne, worth about $360,000, won’t receive any tax relief on the land component. Even if an investor owns a property with a land component worth $500,000, they will have to pay the same $800 annual land tax bill after July 1 as they do now.

Looking on the bright side, land tax is only payable on the land component of the asset, and only when the land value exceeds $200,000. For example, if you own a median-priced investment property in Melbourne, worth about $360,000, and the land makes up 60% ($216,000), you will only pay land tax on $16,000. This equates to $520 a year. Although this is a cost that should be factored into your overall cash flow calculations, it should not be a big enough impost to affect any but the most cash-strapped investor.

The following tables show the amount of land tax payable by individuals for investment properties after July 1. Victoria’s rates compare well for investors with higher value land holdings, but are only on par with the other major eastern seaboard states for those with lower value holdings.

MHow land tax varies between states
	Land value
	$200,000	$500,000	$1 million	$2 million
MNSW	$0	$2,616	$11,116	$28,116
MVictoria	$0	$800	$3,480	$17,760
MQueensland	$0	$750	$6,125	$21,000
MWA	$105	$1,185	$6,360	$22,560
MSA	$270	$1,170	$11,420	$48,420

Although the land tax cuts will benefit investors with multiple properties, the Bracks Government has failed to tackle the real issue: exorbitant levels of stamp duty on the transfer value of property, which affect every Victorian investor and home buyer. Anyone who buys a property at the Melbourne median price must fork out $17,260 '” a huge impost.

The figure is much lower elsewhere. Perth and Brisbane have similar median prices to Melbourne, but in Perth, a home buyer or investor would be up for $13,700 on a $360,000 property; in Brisbane, the figure would be just $5100.

The Real Estate Institute of Victoria says the Melbourne median house price has increased by 105% in the past six years '” yet the stamp duty payable has increased by 179%.

If they’re ever going to get serious about reducing the tax burden for all Victorian investors and home buyers, rather than the top end of town, they must stop fiddling at the margins and significantly cut stamp duty.

Capital gains recap

We’ve received a flurry of questions from subscribers about capital gains tax recently, so to clarify the complex world of CGT and supplement the information in our column of May 17, we thought it worth reiterating some key points:

CGT is only payable upon selling a property, and only for the period during which you held the property as an income-producing asset.

If you live in your home as your main residence before moving out and renting it out as an investment property, you can claim the main residence exemption and won’t have to pay CGT for up to six years after moving out '” provided you don’t purchase another property as and live in it as your main residence during this period. You can only claim one main residence at any given time.

The tax office’s website has a lot of helpful information on the CGT implications for people who have lived in and rented out the same property at different times during their ownership period.

Keeping these points in mind, read on for the answers to this week’s questions.

Seven year hitch

Is it possible to own a property as a pure investment and rent it out for, say, five to seven years, then live in it for another five to seven years, without having to pay CGT when you sell?

If you bought the property as an investment and rented it out from the day it was purchased, you will be liable for CGT on any capital gain the property achieved during the time you held it as an investment; that is the first five to seven years.

You will not be liable for CGT on any capital gain achieved during the time you lived in the property as your main residence.

No negating CGT

I bought out my share of the family home in 1994 and I have rented it out as an investment property ever since. If I move back in will I have to live in it for 12 years to negate CGT?

From the tax office’s point of view, there’s no way to “negate” CGT if you sell an asset that has been rented out at some stage. Moving into the property yourself won’t negate the CGT on any gains achieved during the time you rented out the property, no matter how long you live there.

In your case, you will be liable for CGT on any gains the property achieve during the first 12 years, the period you held it as an income producing investment. If you move back in, you won’t be liable for CGT on any gains achieved during the time you live in the property.

If you move back in, you will reduce the amount of CGT payable when you eventually sell, but only in relation to the period of time you’ve held the property. In other words, if you rented it out for 12 years and then live in it for another 12 years, you will only be liable for CGT on half the capital gain achieved during the entire period of ownership.

Further, because you held the property as an income producing asset for more than 12 months, you will only have to pay CGT on half of the capital gain achieved during the this period. These two factors combined mean that, effectively, you will be liable for only 25% of the capital gain made during your 24 years of ownership.

Main residence

If I live in the property I own for more than 12 months, rent it out for two years and then sell it, will I have to pay any CGT on the sale price? If I buy a second property afterwards to live in, can I claim a primary residence exemption for that as well?

Yes, you will be exempt from CGT, provided that:

• You do not buy and live in another property and claim it as you main residence. If you own a property and live in it for more than 12 months, then move out and rent it out, you are entitled to claim the main residence exemption for up to six years, while at the same time claiming ongoing tax benefits such as negative gearing. You can only claim the main residence exemption for one property at any one time.

Once you buy your new home, the tax office allows a six-month grace period during which you can still claim the main residence exemption on the first property. This gives you time to sell the first property.

• You can satisfy the tax office that you vacated your home and rented it out as an investment property for reasons other than tax minimisation.

Some reasons, such as being transferred interstate for your job or the property no longer suiting your lifestyle requirements, may be considered legitimate. However, if the tax office believes you moved out of the property and rented it out primarily to minimise your tax liability, it may consider this as tax evasion and you could have a real problem.

The tenant factor

We bought a house in an inner Melbourne suburb in 2000. We lived in it as our family home, but rented out the two upstairs bedrooms to tenants to help us with the loan repayments. Because we were receiving some rental income, our accountant advised us that we could claim a portion of the interest on the loan as a tax deduction.

In 2002, we found out we were having a baby, and the tenants decided it was time to move out. We now have two kids and are looking to sell our home. Do we have to pay any CGT for the period when we had tenants?

Yes, a portion of the capital growth you achieved during the time your property produced rental income will be subject to CGT. The amount of CGT payable will be determined by a number of factors including:

• The period of time the tenants lived with you, as a percentage of the time you owned the property.
• The percentage of interest you claimed as a tax deduction.

These calculations are fairly complicated and I suggest you go back to your accountant to work out the finer details.

Mark Armstrong is Director of Property Planning Australia, an integrated property advisory and mortgage sourcing service. He also writes for Australian Property Investor magazine.

You can email any questions regarding property to Mark Armstrong right here, by clicking questionmark@eurekareport.com.au