Australia – A bull run in Melbourne’s commercial real estate values over the last five years has caused a sharp rise in land tax assessments arriving in landlords and property owners’ mailboxes, rattling many investors.
long with stamp duty, land tax is one of the Victorian treasury’s biggest revenue sources, expected to contribute $3.1 billion to government coffers this financial year.
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But the tax rates are calculated using extremely low value thresholds, last reviewed in 2009, which industry professionals maintain are severely out of kilter with current high property values.
Few property owners are willing to share their experiences on the record because of financial sensitivities.
A government spokesperson said: “We’re making land valuations fairer and more consistent across the state.
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“Annual valuations will bring Victoria in line with the rest of the country so they are more up-to-date and accurate.”
“I have one client,” says a commercial law partner at a big city legal firm (he was unwilling to be identified because of the firm’s government work), “who owns a retail shop in Elizabeth Street.
“Two years ago in 2016 their land tax was $10,000. It was revalued and then went up to $50,000 for the last two years. In the current round, it’s gone up to $107,000.
“It’s all being caused by bracket creep. There has been no amendment to the scales and trigger points since 2009 … [and it is] creating capricious and unconscionable outcomes.”
Mr Reisch, a German migrant who arrived in Australia 30 years ago with $2000 in his pocket, says his situation is similar.
“I started as a beekeeper and moved from bees to hospitality to new-car franchises,” he said.
“I built the largest BMW/MINI privately owned franchise in Australia over a 25-year period, employed well over 200 staff at two locations and was official importer of Alpina BMW cars and paid a lot of taxes on the way, and still do.”
After he and his investment partners sold the dealership business they kept key rental properties which are now in a property trust managed by Mr Reisch.
One property is in Commercial Road, South Yarra. It has a seven-year lease to a Volkswagen dealership with annual rental increases fixed to the consumer price index, around 2 per cent.
Land tax on the property was initially around $50,000, it moved to $120,000 three years ago, and then just under $200,000 last year. This year it topped $350,000 which represents half of the property’s rental income.
Most of the rise was attributable to a steep hike in valuations based on “highest and best use” of the land, sparked by a recent apartment-friendly rezoning in the area and rising commercial values.
“There is a concern that this trend will continue and we could be in minus by the end of the lease term or even sooner,” he said.
Mr Reisch acknowledges he is lucky, he still has a profit (on which he pays 30 per cent company tax). Many self-funded retirees will be out of pocket on smaller property investments, such as high street shops, if they experience similar tax increases.
Investors were failing to factor in the potential for a steep rise in land tax when calculating the yield return of the property they were purchasing, he said.
Landlords in Victoria cannot pass on land tax costs to tenants unless they are publicly listed companies.
“Everyone needs to pay taxes. It just needs to be fair,” said Mr Reisch. “You ask yourself, ‘Why invest in a rental property which employs 45 people when the return is being gobbled up by out-of-control land tax?’.”
Daren McDonald, a partner with accounting consultants Shinewing, said property owners’ yields and returns were under assault. A cap on land tax increases or some form of indexing was needed to ensure it didn’t get out of control.
“Some of these people won’t be able to afford to keep the properties they own,” he said.
By Simon Johanson
Source -Sydney Morning Herald
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