Land Tax adjustment at settlement
Land tax is a state government imposed tax on investment properties. It’s very similar to stamp duty and is a major source of revenue for the government. Purchasers who buy property from vendors who have land tax obligations may be liable to pay a portion of the land tax to the State Revenue Office — by way of a land tax adjustment at settlement.
- is payable once the threshold of $250,000 is exceeded;
- has a number of exemptions, including the principal place of residence (PPR) exemption which is not taxable;
- is payable on investment property which exceeds the threshold;
- is calculated on an unimproved lot value, so that the value of improvements on the land, such as buildings and structures, is not taxable;
- is calculated on the aggregate of investment land owned; and
- is calculated on a sliding scale, so that more valuable land attracts tax at an increasing rate.
What are adjustments?
At settlement, outgoings are apportioned between the vendor and purchaser so that each party pays their fair share of the outgoings. The vendor pays outgoings up to, and including, the day of settlement and the purchaser is responsible for outgoings thereafter.
General condition 15 of the standard form contract of sale states as follows:
15.1 All periodic outgoings payable by the vendor, and any rent and other income received in respect of the property must be apportioned between the parties on the settlement date and any adjustments paid and received as appropriate.
15.2 The periodic outgoings and rent and other income must be apportioned on the following basis:
(a) the vendor is liable for the periodic outgoings and entitled to the rent and other income up to and including the day of settlement; and
(b) the land is treated as the only land of which the vendor is owner (as defined in the Land Tax Act 2005); …
How to calculate Land Tax adjustment at settlement?
The differentiating feature between land tax adjustment at settlement and other outgoing adjustments is its ad valorem nature. Land Tax is calculated on an increasing scale on the aggregated value of the vendor’s land and then apportioned across the vendors total land holdings.
The purchaser of property may therefore be exposed to paying land tax at an inflated rate because the vendor owns other land. General condition 15 (b) of the standard form contract of sale recognises this and requires land tax adjustment at settlement to be on the basis that “the land is treated as the only land of which the vendor is owner”. This is called the single holding formula.
The property sold is therefore isolated from the vendor’s other land holding and a calculation of how much the purchaser must contribute to the vendor’s land tax is made on this basis. This additional information of the single holding basis is contained on the second page of the Land Tax Certificate.