How you can avoid Land Tax in your SMSF
Land tax is a form of taxation applied to the value of any land that an individual may own that is not their primary place of residence. In NSW, land is a broad term that encompasses vacant land, commercial areas and residential properties.
However, land tax is not an inevitable cost that investors must pay as it can be avoided by taking advantage of land tax thresholds through the use of Multiple Self Managed Super Funds (SMSF).
Currently the Land Tax Free threshold sits at a land value of $432,000. Therefore any land value that exceeds this can be taxed at a rate as high as 2%. However, each SMSF is treated as a separate entity meaning each SMSF has its own $432,000 threshold. This allows property investors to divide the ownership of their land between various SMSF’s in order to never exceed the threshold in any of these accounts and in effect become exempt from land tax.
To understand this concept consider the following example. Justin owns an investment property in Sydney with land valued at $305,000 as part of his Self-Managed Super Fund. However, Justin has recently taken out an investment loan to purchase an additional property with land valued at $255,000 on the advice of his financial advisor. With this purchase Justin would have a combined Taxable land value of $560,000 obligating him to $2,148 in land tax. However, Justin sets up a second Self-Managed Super Fund to purchase his second property. This means the land he owns in his first SMSF is below the tax threshold and the land in his second SMSF is valued at below the tax threshold which effectively exempts Justin from land tax.
Evidently SMSF’s are an effective tool to boost the returns of your property investment.