Somebody once said that the categories of people who struggle with their income tax are men and women. All jokes aside, it can sometimes appear as if there is a tax for everything, and if you're just getting started as an investor, you may have just come across a new one – land tax. As you may not have had to deal with this before, what do you need to consider, and crucially, how can you reduce your exposure in this area?
Understanding the Tax
Land tax is typically payable by everyone who owns land in almost all of the states and territories. It is subject to a minimum threshold, but it doesn't matter if the land in question is improved or not, or whether you are earning any income, per se, from that investment.
Therefore, if you own multiple properties as part of your investment strategy, you may be liable to pay land tax in every case. However, much will depend on where the actual land is located from a geographical point of view.
Spreading It Out
You may be able to reduce your tax liability in this area if you own individual investment properties in a variety of different states. In this case, each property may fall beneath the minimum threshold in that state, and thus, you may not be liable to pay anything. If you can apply the philosophy to all the other properties that you have in different states, then your tax bill may be less painful.
You may also be able to reduce liability if you register the land in question under a different legal entity. This could be as simple as putting the investment in the name of your spouse, or you may be able to set up a separate legal trust that will own the land. However, take into account the costs associated with establishing and maintaining such a trust before you work out if this is a good approach for you.
Bear in Mind
Remember, the states and territories seem to have a different interpretation of land tax and how it should be collected, so you will need to know where you stand with regard to those thresholds. This is why it's always best to consult with a legal expert if you plan to go down this road so that you don't make any serious errors and find that you end up owing money to the ATO.