Investment Property Ownership Taxes – GST, Land Tax and Income Tax

As far as Perth property investors are concerned, it has been nothing but positive news recently.

Prior to Christmas, REIWA reported “Perth’s residential vacancy rate equals lowest level ever recorded“.

Then in the first week of January they announced “Perth sales activity up 42.5 per cent in December“.

On a personal level, an investment property I own, where the rent is reviewed at the beginning of January each year, has seen the market appraisal move from $350 per week last year to $425 per week this year!

Another of my properties, that has become vacant for the first time in several years, has seen the appraised market rent increase by over 20% from what the vacating tenant was paying.  Further, my managing agent is expecting strong renter interest when we start advertising in coming days, meaning there is little chance it will be left vacant for long.

These good pieces of news for investors are despite REIWA announcing just over a month ago that Renting a property in Perth is cheaper than any other capital city, which is not only a blessing for local renters, but also suggests the downside risk for investors is low.

Last week we kicked off a series of discussions designed to help inform our readers regarding the tax treatment of property investing in 2021.

We are breaking it down into three stages being –

  • Tax Implications of Investment Property Acquisition
  • Tax Implications of Investment Property Ownership, and
  • Tax Implications of Investment Property Disposal.

Last week we started with Tax Implications of Investment Property Acquisition looking at –

  • Transfer Duty (previously known as Stamp Duty)
  • Goods & Services Tax (“GST”)
  • Foreign Residents Withholding Tax

Today we continue with…

Tax Implications of Investment Property Ownership

Once again there are three main tax implications associated with the ongoing ownership of an investment property being –

  • Goods & Services Tax (“GST”),
  • Land Tax, and of course
  • Income Tax

We will initially address the less widely applicable, and less complicated, first two before getting into some nitty gritty on the income tax side of things next week…

Goods & Services Tax (“GST”)

When it comes to GST, we once again need to look at residential property and non-residential property separately…

Residential Property

As mentioned in the previous article, GST generally does not apply to residential property.

In the case of Property Acquisition, there was one exception relating to new residential property.

But that exception no longer apples after the initial acquisition transaction is finalised.

So for ALL residential property, when it comes to ongoing ownership, there are no GST implications nor reporting obligations in regards to either the receiving of rent, or the paying of property holding and management costs.

Non-Residential Property

However, the renting out of non-residential property, can be subject to GST.

This means if you own non-residential property you must consider your requirement to be registered for GST, and if required to be registered, you must report and pay 1/11th of rent received to the ATO as GST (via Activity Statements).

In this case, you will also get to claim back any GST included in your property holding and management costs.

The good news is that even if your non-residential property is subject to GST, generally there is little actual net cost to you, and therefore little actual impact on your return on investment.

This is because in most cases, your tenant will be a business, and they will more often than not be registered for GST themselves.

Therefore GST you charge them is not a really a cost to them (because they get to claim it back from the ATO).  So you can increase the rent to cover the GST, but with no overall cost impact on your tenant.

So in most cases, GST just means some extra work for your accountant, and some extra administration, but little impact on your actual return on your investment.

Land Tax

Land Tax is imposed by the WA State Government.

It is levied each year on land that is not used as the owner’s principal place of residence.

This means it applies to both residential property (which is not used as your home) as well as non-residential property (including vacant land).

The tax is imposed on the total unimproved value of all land held by the same owners.

The unimproved value of the land is determined by the Valuer-General.

The rates are as follows –

Aggregated taxable value of land Rate of land tax
$0 – $300,000 Nil
$300,001 – $420,000 Flat rate of $300
$420,000 – $1,000,000 $300 + 0.25 cent for each $1 in excess of $420,000
$1,000,000 – $1,800,000 $1,750 + 0.90 cent for each $1 in excess of $1,000,000
$1,800,000 – $5,000,000 $8,950 + 1.80 cents for each $1 in excess of $1,800,000
$5,000,000 – $11,000,000 $66,550 + 2.00 cents for each $1 in excess of $5,000,000
$11,000,000 + $186,550 + 2.67 cents for each $1 in excess of $11,000,000

If you are liable to pay land tax, you may also be required to pay Metropolitan Region Improvement Tax (MRIT) which will be included in the same assessment notice.

MRIT is an additional special purpose tax used to finance the cost of providing land for roads, open spaces, parks and similar public facilities within the metropolitan area.

MRIT is imposed on property with a land tax liability at a rate of 0.14 cent for every dollar of the aggregated taxable value of the land in excess of $300,000.

It is payable in addition to land tax on property located in the metropolitan area.  You can view a map of the area subject to MRIT here.

Illustrative Example 1

Peter Smith owns two properties, one being his home valued at $1,000,000 and one, an apartment which he rents out, valued at $600,000.

First thing to know is that the market value of the properties has nothing to do with how much land tax, if any, will be payable!

Instead, we must know the Unimproved Value of the land, which will come from the Valuer-General.

Let’s say the Valuer-General determines the unimproved value of the land upon which his home is located is $500,000 and of the land upon which the apartment is located is $150,000.

Now remember, the land upon which Peter’s home is located is excluded from Land Tax.

Therefore, we only need to consider the apartment.

As the unimproved value of the land component of that property is under $300,000, no Land Tax (nor MRIT) will be payable.

However, if the unimproved value of the land component of that property was say $400,000, then both Land Tax (and potentially MRIT) would apply (as per the above table, the Land Tax payable would be a flat $300).

Illustrative Example 2

Jane Smith owns three properties as follows –

  • Home – Valued at $750,000
  • Rented City Apartment – Valued at $450,000 with an Unimproved Land Value of $200,000
  • Regional Holiday Shack – Valued at $600,000 with an Unimproved Land Value of $500,000

As above, we can ignore the home as it is not subject to Land Tax (nor, therefore MRIT).

The total Unimproved Land Value of Jane’s properties that are not used as her home is $700,000 ($200,000 + $500,000).

Per the table above, Land Tax of $1,000 will therefore be payable (being $300 + 0.25 cent for each $1 in excess of $420,000).

MRIT will also apply to the Unimproved Land Value of the Rented City Apartment of $280.  But no MRIT will apply to the Regional Holiday Shack (as it is outside the metropolitan area).

Income Tax

We will continue with the all important Income Tax implications of property ownership next week…