We have been contacted on a number of occasions by the Victorian State Revenue Office (SRO) concerning clients who have rented out their home for a period without an understanding of the Land Tax implications. There are various reasons why you might consider vacating and renting out your home for a limited time. You might want to take an extended holiday and feel more comfortable if someone is living there and paying rent. You may have an additional property, a holiday house for instance and a change of pace that might be appealing. Or you might need to relocate overseas for work purposes for a period of time. Whether renting out your main residence for financial or security reasons, there are significant tax implications to consider including Land Tax.
Land tax is charged on an annual basis and only on the value of the land, not the improved value resulting from the addition of buildings and landscaping. Your local council determines the value which forms the basis of your land tax calculation.
A table of land tax calculations is available in our Investment Property Ownership Handy Reckoner.
Exemptions galore but…
The main exemption to the paying of Land Tax applies to the “family home” or, more formally speaking, the principal place of residence (PPR).
The PPR exemption applies to land owned by a natural person; a legal term for “person or individual”. (We wonder what an unnatural person would be. Ed.) It does not apply to a company or other body corporates. There are other PPR exceptions covering various circumstances including temporary absences such as working interstate or overseas, the time between selling and buying a new home and what happens in the case of death or inability to care for oneself.
For the vast majority of us though, if you live in your home, no Land Tax applies to that property.
However, if you vacate your home for a period of time and rent it out, you can expect that Land Tax will apply. The general rule is that for a PPR exemption to apply for a given year where the individual owner (or resident vested beneficiary) is temporarily absent from his or her PPR, the landowner must have occupied the property as their PPR for at least six consecutive months immediately before the absence. It is important to keep in mind that the Capital Gains Tax (CGT) main residence exemption is quite different to the Land Tax PPR exemption, and so the ‘six year rule’ for CGT purposes is irrelevant in the context of Land Tax.
If you are considering vacating your home for a reasonable period and do not want an unwelcome Land Tax surprise from the SRO, discuss your intentions with Saward Dawson. Remember though, if you intend to rent out your home for a time, you need to look at the entire tax picture. There may also be Income Tax and Capital Gains Tax implications as well as Land Tax.