Understanding the New NSW Land Tax
Starting 31 December 2024, the NSW government will calculate land tax based on a new threshold. Property owners will pay $100 plus 1.6% of their combined property value above the tax-free threshold, which is set at $1,075,000 for 2024.
For example, if your combined land value is $2,000,000:
Subtract the threshold: $2,000,000 – $1,075,000 = $925,000
Calculate 1.6% of $925,000: 0.016 x $925,000 = $14,800
Add the base amount: $14,800 + $100 = $14,900
So, you would owe $14,900 in land tax.
For those with holdings above the premium threshold of $6,571,000, the tax will be $88,036 plus 2% of the land value above this threshold. These thresholds will be fixed and will not be adjusted annually to reflect market changes. The government anticipates an additional $1.5 billion windfall over four years. Revenue from land tax is projected to grow by 8.7% annually until 2027-28, totalling $36 billion.
Impact on the Rental Market
There won’t be an immediate impact on the rental market, but if rental vacancy rates stay under 2%, any increase in costs to landlords will likely be passed on to tenants. The yield on rental income for houses is low, and land tax increases would primarily affect investors and renters of freestanding homes and higher-value apartments. This could worsen the rental market at a time when affordability has reached its worst levels in 17 years.
Considering the Merits of Selling Property Today
Property owners often ask me about the merits of selling in today’s market. Several factors should be considered:
Mortgage Status:
If you have a mortgage, can you refinance the loan to secure a better interest rate or more favourable terms?
Capital Gains Tax Implications:
In Australia, capital gains tax (CGT) is payable on the profit made from the sale of an investment property. The amount of CGT owed depends on how long you’ve owned the property and your taxable income.
If you have held the property for more than 12 months, you may be eligible for a 50% discount on the capital gain, reducing the taxable amount.
For example, if you bought a property for $4,000,000 pre-COVID and sold it for $6,000,000 today, your capital gain would be $2,000,000. After applying the 50% discount, the taxable gain would be $1,000,000, which would then be added to your taxable income for the year.
Investment Analysis
Compare the return on investment from selling your property and potentially reinvesting the proceeds versus retaining the property and earning rental income.
Property Investment Analysis
For a property valued at $6,000,000 with a land value of $4,000,000 and an annual gross rental income of $85,000, we considered the following expenses:
NSW Land Tax: $46,900 (calculated as $100 + 1.6% of $2,925,000, the amount above the threshold)
Agent’s Fee: $4,250 (5% of $85,000)
Council and Water Rates: $2,000 (assumed average)
Total Expenses: $53,150
Net Rental Income: $31,850 (Gross rental income of $85,000 minus total expenses of $53,150)
Gross Return on Property: 0.531% (calculated as $31,850 / $6,000,000 * 100)
Bank Investment Analysis
Investing the same amount of $6,000,000 in a bank at an interest rate of 5% per annum would yield:
Annual Interest: $300,000 (5% of $6,000,000)
Gross Return from Bank Investment: 5%
Comparison
Property Investment Gross Return: 0.531%
Bank Investment Gross Return: 5%
Conclusion
Investing in the bank at an interest rate of 5% per annum provides a significantly higher return of $300,000 annually compared to the net rental income from the property, which yields $31,850 annually. The gross return on the bank investment is 5%, while the property investment offers a gross return of only 0.531%. This comparison clearly shows that, under the given conditions, a bank investment is more lucrative than the property investment.
By considering your mortgage status, the implications of capital gains tax, and potential returns from alternative investments, you can make a more informed decision about whether to sell your property in today’s market. Additionally, it is advisable to seek independent financial advice from your accountant to ensure you are making the best financial decision based on your individual circumstances.