How to navigate rising land tax 

Over the last 30 years, land tax has risen at an exponential rate, and it is now a significant expense for property investors as well as a significant revenue stream for state governments.  

Historically, the general trend has been for the percentage-based tax rates to decrease but the land value thresholds to increase, which you may assume would normalise land tax relative to property prices and rental yields. However, the rate at which these adjustments have been made is well below the rate of land value growth in Australia. In recent years (post covid), most states have either frozen their indexation of land tax rates or decreased the thresholds, as in the case of Victoria. This has resulted in land tax bills increasing on a relative basis for property investors.  

State based debt has risen significantly in Australia in recent times and forecasts indicate that they will continue to rise in the future, meaning state governments are more reliant on land tax revenue than ever before. Despite the long-term historical trend to index land tax rates and thresholds, recent years have begged the question of property investors, what would happen if land tax rates were not adjusted in the future? 

Let’s start by looking at the changes in land tax rates in Victoria, New South Wales, and Queensland over the last two decades. 

Historical Adjustments to Land Tax 

Victoria: 

• In 2005, the tax-free threshold was increased from $150,000 to $175,000, and the percentage-based rates scaled up from 0.1% at $175,000 to 4% over $2,700,000 – prior to 2005, the top rate was 5%.   

• In 2006, the tax-free threshold was increased to $200,000, and the percentage-based rates scaled up from 0.2% at $200,000 to 3.5% over $2,700,000. A new 7-tier progressive structure was introduced with the top rate being reduced from 4% to 3.5%. 

• In 2009-2021, the tax-free threshold was increased to $250,000, and the percentage-based rates scaled up from 0.2% at $250,000 to 2.25% over $3,000,000.   

• In 2022- 2023, the tax-free threshold was increased to $300,000, and the percentage-based rates scaled up from 0.2% at $3000,000 to 2.55% over $3,000,000.   

• Currently, the tax-free threshold has been reduced to $50,000, and the percentage-based rates scale up from 0.3% at $300,000 to 2.65% over $3,000,000.   

New South Wales: 

• Prior to 2004, the tax-free threshold was $317,000, and a flat percentage-based rate of 1.7% applied above this threshold.   

• In 2004, the tax-free threshold was scrapped, and percentage-based rates scaled up from 0.40% at $0 to 1.40% over $500,000.   

• In 2019, the tax-free threshold was set at $692,000, $100 plus a 1.6% rate applied above this threshold and a 2% rate applied above $4,231,000.   

• In 2024, the NSW government removed indexation of the tax-free threshold so it is fixed at $1,075,000, $100 plus a 1.6% rate applies above this threshold and a 2% rate applies above $6,571,000.   

Queensland: 

• In 2009, the tax-free threshold was $599,999 and the percentage-based rates scaled up from 1.00% at $600,000 to 1.75% over $5,000,000.   

• In 2019, the tax-free threshold remained at $599,999, and the percentage-based rates scaled up from 1.00% at $600,000 to 2.25% for over $10,000,000.   

• Currently, the 2019 individual rates still apply. Higher rates for companies and trust have been introduced since 2019.  

In summary…  

With the exception of New South Wales that has consistently indexed the tax-free threshold each year until 2024, Victoria and Queensland have left their land tax rates threshold largely unchanged which has resulted in significant bracket creep.  

The combined impact of rising land values and bracket creep is clearly reflected in the land tax revenue each state now collects. Over the past decade, NSW’s land tax revenue has jumped from $2.5 billion to $8.2 billion – a 230% increase. In Victoria, it’s risen by more than 300%, from $1.75 billion to $7.1 billion. And in Queensland, revenue has grown by nearly 180%, from $730 million to $2.5 billion. On average, land tax revenue across these three states has increased by more than 13.5% per annum over the past ten years. That’s not just due to higher land values – a greater proportion of property owners are now paying land tax than they were a decade ago. 

Sidebar: It is interesting that Melbourne is often criticised for its land tax regime. Its land tax revenue has increased 15% p.a. over the past decade, but that is only slightly higher than NSW and Queensland at 12.6% and 13%, respectively. Furthermore, Queensland budgets for the highest land tax increase over the next 4 years – an average rate increase of 13.1% p.a. – which is almost double the rate of increase of Victoria and NSW.  

What impact would this have on property yields long term? 

One of the key attributes of investment grade property (as discussed in this blog) that we often speak about is a strong land value component, typically at least 70% of the property value. Highly sought after land tends to appreciate, whereas buildings tend to depreciate, so it makes sense to maximise the value of the component that will grow in value.  

The growth benchmark we use for investment grade properties, with a high land value component, is an average long-term growth rate of ~7.5% per annum, being 5% above inflation. Investment grade properties also typically tend to have lower rental yields of ~2% per annum, on account of the lower building value component.  

Over the last 30 years, median house rental prices have increased on average by ~4.2% per annum. Assuming these trends continue, we should therefore continue to see land values outpace rental income growth, which mathematically will continue to drive down percentage rental yields and increase the relative impact of land tax over time.  

My calculations 

To explore the possible impact of the land tax rates remaining unchanged in the future, I have run some calculations based off the assumptions in the paragraph above using a $1 million debt free investment property in Victoria, New South Wales, and Queensland. 

If we factor in other property expenses (such as rental manager fees, insurance, rates, maintenance etc.) of 30% of gross rental income, a debt free property today should exhibit the following yields: 

• Net yield before land tax: 1.40% 

• Net yield after land tax In Victoria: 1.15% 

• Net yield after land tax In New South Wales: 1.40% 

• Net yield after land tax In Queensland: 1.30% 

In 15 years’ time, the same property would be worth circa $2.7 million (in future dollars), and it would exhibit the following yields: 

• Net yield before land tax:  0.90% 

• Net yield after land tax In Victoria: 0.64% 

• Net yield after land tax In New South Wales: 0.61% 

• Net yield after land tax In Queensland: 0.56% 

In 30 years’ time, the same property would be worth over $8 million (in future dollars), and it would exhibit the following yields: 

• Net yield before land tax: 0.57% 

• Net yield after land tax In Victoria: 0.24% 

• Net yield after land tax In New South Wales: 0.19% 

• Net yield after land tax In Queensland: 0.17% 

Land tax eats away at net rental income  

If land tax rates were to remain unchanged or not indexed in line with property growth, these figures illustrate the insidious nature of land tax on property yields into the future.  

We do not have a crystal ball and we do not know what the state governments will do with land tax rates in the future. However, based off the historical evidence, it is very unlikely that land tax rates will be adjusted in line with property prices moving forward. Consequently, land tax will continue to creep up on property investors. This highlights the importance of capital growth over income, and investing in the highest quality ‘investment grade’ properties. 

Residential property is not an income play 

For anyone who thinks that residential property is an income play, I would encourage you to think again.  

We get approached by potential clients from time to time who describe to us their retirement plan in which they intend to build up a property portfolio which will produce enough passive income to fund their retirement needs. If land tax rates were to remain unchanged, looking at the yields above, you would need to have ~$35M in property to produce an income of ~$100,000 per annum (before tax).   

Residential property is not about income, it is about leveraged capital growth. It is a wonderful asset class for wealth accumulation, but a well thought-out financial plan must include a healthy amount of diversification of assets to accompany residential property, particularly assets that are liquid and offer more consistent yields.  

In contrast, the yields from a share portfolio tend to remain relatively consistent, regardless of its size. In fact, as the portfolio grows, the relative impact of account-keeping fees generally decreases, which can even improve the yield. For instance, a $1 million share portfolio with a 3% yield could continue to produce the same 3% yield as it grows to $5 million, $10 million, or even $100 million. 

Shares + property  

Land tax is one of the key reasons we believe most people would benefit from diversifying their investments across various asset classes, including both shares and property.  

This highlights the importance of working with an advisor who has deep knowledge of both asset classes and is completely independent and agnostic. Such an advisor can help you create a plan tailored to your needs, not one shaped by their own interests or limited experience.