Tax Traps for Out-of-Towners

Investing outside your home state lets you to diversify your portfolio, create a holiday or retirement property and enjoy some tax-deductible travel in the process. But there are real traps in this area and the state you choose can determine how much profit you will make.

Stamp duty is levied by the Office of State Revenue of the state in which you buy. It can be described as a purchase tax levied at varying extortionate levels. For example, stamp duty on a $500,000 property will be $17,990 in NSW, $25,660 in Victoria, and $15,975 in Queensland. In NSW and Queensland it is usually paid via your solicitor/conveyancer before settlement; in Victoria it is generally paid on settlement via your mortgage provider.

Some states levy stamp duty on your mortgage. Victoria has abolished this tax on borrowing, but it is still levied in NSW and Queensland. You usually pay it to the Office of State Revenue via your mortgage provider at the time of settlement.

Regardless of which state, your property title is the legal document that certifies you as the rightful owner. Therefore, when you buy a property from someone else, the title needs to be updated to show you are the new owner. The fee for this is payable to the Land Titles Office in the state the property is located.

When you borrow money to buy a property and the lender takes a mortgage over it, a registration of mortgage fee is also payable to the Land Titles Office. This is to update the title to show the lender has a legal interest in your property.

Lenders will advance up to 95% of the property value; however, if you need to borrow more than 80% of the purchase price your lender generally requires you to pay mortgage insurance. If you think this is to protect you, you’re wrong; it is to protect the lender against any shortfall incurred on a mortgagee sale. You are usually required to pay mortgage insurance to the mortgage insurance company, via your lender. This is an additional upfront cost.

A loan establishment fee is payable to the lender to cover the costs involved in setting up your loan. It covers the lender’s legal costs, a valuation of your property and preparation of all the necessary mortgage and legal documents, and is payable at or before settlement.

You will need to pay your own solicitor, conveyancer or settlement agent to look after your end of the purchase. Costs for this service can vary enormously so get a quote before you instruct.

This table compares all of these costs for a property purchased at a cost of $500,000 in NSW, Victoria and Queensland.

Land tax is an annual wealth tax levied by each state and the ACT, so it is important to take this into account when buying an investment property. Your principal place of residence is generally exempt from land tax; however, a family can only claim the exemption for one property, and the exemption is available for only one residence regardless of where you live.

Where more than one residence is used, you must nominate one as the family’s principal place of residence. The other will fall into the land tax regime of the state where it is located.

Land tax increases exponentially: the more land you own in a particular state, the larger percentage you pay. For example, Victoria currently has nine different rates, ranging from nil to 4% of the taxable value of the land. Land tax rates are complex and there is no set formula used across the nation; you have to work out your tax position depending on the location of the property.

To give you a better idea, the following table compares the amount of land tax you would pay if you owned one parcel of land with a taxable value of $300,000 in each state, and if you owned two parcels of land in each state, each with a taxable value of $300,000. As you can see, if you owned one parcel of land in NSW and one in Queensland, you would pay a total of $1,200 land tax ($1,200 to NSW, nil to Queensland). If they were located in Victoria and Queensland you would pay a total of $400 land tax. If both were in NSW the land tax bill would be $3600; both in Queensland would cost $1,450, and both in Victoria would cost $1,180.

1. NSW land tax is nil where the taxable value of land is less than $25,000.
2. Victorian land tax is nil where the taxable value of land is $174,999 or less.
3. Queensland land tax is nil where the taxable value of land owned by an individual who resides in Australia is $449,999 or less. If owned by a company, trust or absentee it is nil where the taxable value is $299,999 or less and so $1,500 would be payable.
4. If owned by a company, trust or absentee $6,000 would be payable

Finally, intestacy laws will apply if you die and all or part of your estate is not disposed of by will. This can occur if you have failed to make a will, your will is not valid (if you have failed to sign it, for example), all of your beneficiaries have died before you, or your will fails to dispose of all of your property. Distribution of your estate, or part of your estate on intestacy is governed by statutory provision. Owning property in different states and dying intestate often results in added complications and additional legal expenses because the laws relating to intestacy differ between states and can be affected by federal Family Law provisions.

Barbara Smith, email smith.koken@optusnet.com.au operates Oasis Wealth Pty Ltd, a fee-for-service financial advisory company.