Legal Tip 318: Land Tax in Property Purchase Contracts

Discussion in 'Legal Issues' started by Terry_w, 12th Nov, 2020.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Beware when purchasing property in NSW as some sellers will place a condition in the contract that has the buyer agreeing to the apportionment of land tax for the year in which the sale takes place. This will be detrimental to the purchaser whether they will be living in the property or renting it out.

    In NSW land tax is paid in advance for the whole year and the taxing date is 31 December each year.

    If you sell in say June you have already paid for the rest of the year, so someone buying the property and renting it out will get a bit of a bonus potentially. So often they want compensation for this.



    Example

    Ned has several investment properties in NSW and is selling one of them because of the crippling amount of land tax he pays each year. The land of this property is worth $1mil and Ned paid $16,100 in land tax for the land he held at the previous new year’s eve.


    Ned has had the property on the market for a one and on 1 July they enter a contract to sell – almost. Ned has a clause which says the land tax would be apportioned and the purchaser will pay land tax to Ned for the time period from the date the contract is entered into until 31 Dec at the end of the year.

    For this purchaser it would mean $8,000 extra is payable to Ned.

    This would be unfair if the person was to be an owner occupier, or perhaps an investor who owned no other property as they could qualify for the land tax free threshold which is currently $755,000



    Similar things can also happen in other states too.



    There are also tax consequences to consider that can arise from this.
     
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  2. Yson

    Yson Well-Known Member

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    Nice, probably will have this clause in when I sell my property, haha, but would the potential buyer lower their offering to factor in this extra tax.
     
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  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Each party needs to safeguard the risks of a delay which could trigger the land tax issue. Agreeing on a earlier / later settlement is wise.


    eg A delayed sale by a owner occupier may not raise any land tax issue for that owner. But a early sale and inability to occupy by the buyer on the taxing date could trigger land tax for them. In that case delaying settlement would be desirable and also not impact the vendor. Its the art of negotiating a sale. Date could be as important as price.
     
  4. High Platform

    High Platform Member

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    I can see that the sellers are misusing the contract and duping buyers to pay land tax. This isn't illegal yet but definitely immoral. I wish there was a regulatory body which can stop this misuse.
     
  5. High Platform

    High Platform Member

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    Not if they don't know the tax amount. This is highly immoral.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It's not immoral, just a optional contract term.
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A contract is an agreement between two parties. A buyer isnt obliged to accept the terms and a seller can ask whatever they want. When its unreasonable nobody buys. A meeting of the minds finds consensus. I argue that if a buyer considers it objectionable or immoral they didnt read and understand what they were doing - why did they sign ?. Its why obtaining legal advice on a contract prior to signing is recommended.

    I know plenty of people who include the clause and their lawyer requests it be struck. And it is. Less so with a developer and OTP
     
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  8. High Platform

    High Platform Member

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    Well, I have seen that clause. Its a sneaky checkbox which is difficult to understand and easy to miss. I have experienced that big portfolio holders try and sneak the land tax clause in by manipulating words. Its a grey area and sellers do try to take advantage. I agree that its upto the buyer to do their own due diligence.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It is not just a check box but a term of the contract. - a clause
     
  10. High Platform

    High Platform Member

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    I am glad that the legal experts think that these kind of clauses cant be sneaked into the contract and its all black and white.
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Glad you have come around!

    But, seriously, the reason for my post was to point this out because some people are not aware and don't get legal advice. The first word of my post was 'beware'.
     
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  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Here are copies of the relevant clauses in the 2019 NSW standard COS

    upload_2021-1-12_18-4-6.png

    and

    upload_2021-1-12_18-5-52.png
     
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  13. HA_IP

    HA_IP Well-Known Member

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    In the same situation now.

    Say
    Contract date: 1st Dec 2022, but
    Settlement date: 20th Jan 2023

    How is the ownership decided ? At settlement or on Signing Contract ?

    I thought Ownership doesn't start until Settlement date, so If I sign contract on 1st Dec 2022, mean I don't own anything in the year 2022 Dec 31st - which I'd expect Seller already paid 100% of 2022 and adjusting only for 20days of 2023.

    Now question is how is this pro-rata Land-tax calculated?
    - Based on Seller's total ownership (say above 822k threshold in NSW) or
    - Based on Buyer's total title holdings (say below 822k threshold in NSW)
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Tax Tip 95: Land Tax in NSW Between Exchange and Settlement Tax Tip 95: Land Tax in NSW Between Exchange and Settlement

    This is determined by the contract. See above for the relevant clauses in the standard contract of sale from 2019.
     
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  15. HA_IP

    HA_IP Well-Known Member

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    I think, I asked the wrong question, May be I should ask "Land Tax Adjustable" refers to the year in which Title transfers and Ownership of the land on 31st of December of that year, in this case 2023 (not 2022) ?

    I read your other post in this regard, which reflects ownership attached to benefits from tenancy, which is not the case - as this is vacant position. Based on that, my understanding:

    Land Tax for 2022: 100% Land tax & Surcharge liability on Vendor, as 31 Dec 2022 Vendor owns the land even though contracted on 1 Dec 2022 that transfer of title due on 20 Jan 2023, nothing to adjust for Purchaser for the year 2022 ?

    Land Tax for 2023: 5.5% liability on Vendor (20 days/365 days in 2023), as at that point in time , it is assumed, 31 Dec 2023 Purchaser owns the land title for remaining 94.5% after contracted transfer 20 Jan 2023, If this is true, then Land Tax calculation rule should apply threshold of 969k for 2023 and aggregate Land holding of Purchaser (owns no other land),

    Why would Vendor push for Land tax adjustable clause, if Purchaser's Land tax is much less with Threshold (single land owner, utilizing full threshold benefit) say 7k for 2023, but Vendor's would have been 23k (multiple land owner, threshold benefit doesn't apply), had he held the land upto 31 Dec 2023.
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Because it is money in their pocket. They would have already paid for the whole year but they might only be there in the property less than a month
     
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  17. HA_IP

    HA_IP Well-Known Member

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    May be I am missing something. Will need to check with Revenue NSW how the calculation is done.

    Land Tax for 2023, wont be due until 1st Jan 2024, which would be much lower for new owner cause full benefit of 969k threshold. I thought - if Vendor leave it Not adjustable with Settlement in January 2023, then full amount will be paid by Purchaser in 2024, and Vendor will not bare anything for 2023
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Land tax in NSW is paid on the ownership of land on new year's eve. Revenue NSW won't be able to help you with this as it is a contractual matter agreed on between the buyer and seller.

    Think of it as the owner paying the full year in advance and the purchaser agreeing to reimburse them for the amount that related to when they will own the property for that year.
     
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  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Land contracts dont need to be "fair". eg You can be buying a $400K propertry that is within the tax free but the vendors owns 10 so they incur land tax. Its what the parties agree based on the contract they freely make. Its why legal advice BEFORE signing is important. A solicitor may instruct buyers to request the clause be altered so no adjustmnet is made as the vendor incurs land tax not a future occupant. BUT the vendors may want to leave it in or alter its wording IF a settlement intended for late December is delayed then the act to delay eg through bank issues may result in land tax that was avoidable and so the vendor may want the buyer to pay this.
     
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  20. HA_IP

    HA_IP Well-Known Member

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    I see, so is like Pre-paid yearly bill,

    then I agree with some of the previous comments, it's unfair to new owner who's bill wont fully consume the threshold 822k, and Land tax bill would have been otherwise say 6k (with threshold fully used in this land) vs. 23k (when threshold fully consumed in other lands, and loading 100% land tax on land being contracted, as-if there were no threshold)