The PROPERTY DOCTORS, Sydney Australia Novak Properties

EP. 1401 GORILLA TAX PRESSURE: SQUEEZING TENANTS OUT

• Mark Novak, Billy Drury • Season 30 • Episode 1401

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Bracket creep may be the most significant challenge facing property investors today, yet it's flying under the radar for many seasoned property owners. This eye-opening discussion reveals how the NSW government's decision to freeze land tax thresholds until 2027 is creating a "gorilla squeeze" on property investors that will reshape the entire investment landscape.

The numbers are staggering. A single $2 million investment property could incur $15,000 in annual land tax, while adding a second property might mean paying $25,000-$30,000 more per year just for the privilege of providing rental housing. One shocking example shared reveals a property generating $160,000 in annual rent now facing a $400,000 land tax bill—an unsustainable position for any investor.

This tax situation strongly favours strata properties where land values are divided among multiple units, potentially allowing investors to stay below thresholds. Meanwhile, standalone houses are becoming tax liabilities, creating a likely future shortage in the rental house market. The disparity between property and other investments is striking—$10 million in stocks attracts no equivalent ongoing tax, while property investors face mounting costs from both interest rate increases and land tax bracket creep.

For current and prospective investors, understanding these changes is crucial. The property investment landscape is transforming before our eyes, with many landlords already questioning whether to sell their properties, substantially increase rents, or abandon property altogether for more tax-friendly investments. If you're considering property investment or already own investment properties, you need to recalculate your strategies in light of this significant tax development that's expected to generate an additional $1.5 billion in government revenue at investors' expense.

Speaker 1:

Unpacking the secret tax that nobody talks about, where massive, massive fundamental changes have happened over the last 24 months. We're going to talk about it right now. It's a big tax, it's a property tax. Stay tuned, I'm the ringleader, so let's go. Good morning, this is the saucy one, billy Drury, the old man in a young man's body. How are you this morning?

Speaker 2:

I'm well, thank you, addressing a big topic with the property doctor of the year.

Speaker 1:

Yeah, I was in a cafe on Saturday talking to a cafe operator about this tax and there was two or three major components that he didn't understand. He was an advanced property investor, by the way, um, and when I sort of sat down and explained it and broke it down, he was like so the face of investing is going to change off the back of this tax. It is changing off the back of this tax. It is a big tax.

Speaker 2:

Yeah, and it's known as bracket creep. As property values rise, more investors are going to be impacted, leading to increased tax liabilities, and that is a phenomenon known as bracket creep.

Speaker 1:

Can you just read that out?

Speaker 2:

Yeah, that's a definition.

Speaker 1:

Okay, what's the definition of?

Speaker 2:

That is the definition of bracket creep, definition of that, that is the definition of of bracket crew. So um can we, can we?

Speaker 1:

just? Can we just get straight into it? Can I just New South Wales. They have decided to freeze the land tax threshold. So you pay more land tax as the years come on. Land tax as the years come on, so there's, it starts creeping over the bracket so you start paying more. It happened with stamp duty back in 1986. When they froze the stamp duty thresholds it was equally spread across all classes. So the high class paid the higher tax, the lower class paid the lower tax for stamp duty. They froze the brackets. Now all property values when they sell are in the highest stamp duty bracket. Everyone is paying the highest stamp duty.

Speaker 2:

They have now adopted this move with land tax so it's for land value above a million and seventy five thousand dollars. Tax is calculated as a hundred dollars plus 1.6 percent of the land value exceeding the threshold. So the changes are from 2024, 2025. You could see there used to be a bracket change, whereas this is frozen First time 10 years. You can see the last 10 years there. It also changed foreign purchaser surcharge duty, which increased from 8% to 9%. Thank you and surcharge tax from 4% to 5%.

Speaker 1:

Who cares? I'm worried about the mum and dad investors, not the foreign guys. So guess what happened in those years. So for anyone who doesn't know what land tax is, Billy, can you explain it?

Speaker 2:

I can, yeah, I can. Don't read it out, it is it is a land tax. Property value is exceeding that threshold.

Speaker 1:

Billy, if we wanted to use ChatGPT, everyone's got it. You don't need to have ChatGPT. Then read it out.

Speaker 2:

That's straight up what it is, though Nothing more to it. It is a land tax on property values that exceed that threshold.

Speaker 1:

Yeah. So to give you an idea, in our area we have houses for $2 million. If you buy that house for $2 million and it's your only investment you are probably going to be up for about $15,000 of tax a year because you have the house. If you buy two of those houses houses the second house you'll buy you'll be up for about 30, 25 000, 30 000 that year for that second house in land tax. Ie, I got a couple of properties. I got a house. I got a house I rent out in narowena and I have to pay 650 a week before I pay the mortgage to the tax man. It's big.

Speaker 1:

So now that they've frozen these land taxes, so what actually happens is the government assesses the value every year of your property. They don't just assume that you're going to tell them what it's worth. They don't assume to know what it's worth. They get the value of general for an assessment. So the value of general is not far off the property, not far off market value these days. So what you're going to notice, ladies and gentlemen, is a swing towards strata property and the reason you're going to see that is purely off land tax. So for every say, for instance, if you own three or four units that could be the same net effect on land tax than one house. And I'll word it another way If you own $2 million worth of units, say four units for 500K or one house, you will get smashed on the house for land tax and pay no land tax for the four units of the same value.

Speaker 1:

Only because you may come under that threshold, right yeah so with units, they'll say what's the land value, the block of land worth divided by 10, because there's 10 units in the block approximately it by 10, because there's 10 units in the block approximately.

Speaker 2:

Yeah, and these changes, from what I can find online, are expected to create an additional 1.5 billion dollars in revenue. So this is a huge ticket item, huge ticket um, again, you poke the farmer, you.

Speaker 1:

you make a. We called the investor yesterday the farmer, and if you tie the farmer's hands and legs up, he won't be able to produce the crop. So if you make it harder for the landlord with these costs, they are going to make it harder for the tenant. Why? Because they're going to sell their properties because it's too expensive to hold or they're going to try to recoup some from the tenants because the property tax is crazy.

Speaker 2:

Yep. And these thresholds won't be revisited until June 1st 2027. So there's quite a long period there where property values will increase. More investors will be impacted by this, so it's quite important.

Speaker 1:

Well, I've worked out that a landlord is going to be paying 3300 in year one more just because of that freezing of the um, of that bracket creep uh, 6600 in year two, 9900, 1100 in year three. They will be paying, as a result of this bracket creep, 11 000 per year more than what they're currently paying for supplying a property to a tenant. And what I did say to Billy this morning before we went on air is I don't know any other asset class that penalises like this. If you own $10 million worth of stocks, you don't have to pay any sort of stock tax, land tax, no tax. But if you decide to choose property and be a landlord, you get smashed.

Speaker 2:

Gorilla. It's a gorilla squeeze. So there you go. I guess it's relevant to bring this on air. Not many people are talking about it. It is going to have an impact it's good to be aware of and it's funny how it flies under the radar, even to someone like a friend in the cafe who's a seasoned investor. So you know it's.

Speaker 1:

Well, no one's grabbing these guys. The only one grabbing these guys is their accountant at the end of the year. So a lot of these guys haven't even had the chance to talk to their accountant about this bracket creep with land tax. So they're just only now they're starting to speak to their accountant. They're going I'm paying how much land tax this year? And they're going what am I doing this for? Why am I getting so hammered? So it's either a sell the property or, B put your rents up to try to subsidize the tax that you're getting paid. Yeah, and then they're triple the interest costs because I went from 2% to 7%.

Speaker 2:

There you go. That's what we're finding. The net effects of land tax in our market. Giddy up, it's gonna be a big two years never, never seen that, that threshold frozen before. I'm just gonna finish. That can be our closing statement. Just what's later? What's lisa gotta say? I think we've got a few comments here. Um, lisa's got a client paying four hundred thousand dollar tax bill this year. I do know the property, wow yeah, a lot of money.

Speaker 1:

Yeah, how listen to this? One property, one property they have rented for 160 000 a. As an example. Their land tax is $150,000. They have to pay $150,000 every year. That was last year. They just got their land tax this year. Guess how much it was $152,000.

Speaker 2:

Tell us $400,000.

Speaker 1:

So they got $400,000 in in land tax. They have to pay the government this year 400,000 and their rent was 160,000 crazy one property, so a single title.

Speaker 1:

Tor Torrance title property is dead. It's going to be very hard to rent houses in the years to come because landlords don't want to hold those assets any longer and strata title assets is the way they're going to go if they go. Or they're just going to get out and go put their property in the stock market because they don't have land tax. Congratulations to the stock market Dumb government.

Speaker 2:

There you go. Thank you, Mark Very insightful.

Speaker 1:

Thank you, billy. Thank you old man in the young man's body.

Speaker 2:

Have a good day everyone. Bye-bye, Bye-bye.