Will falling property prices cut your rates and land tax?

Property prices may be falling, but that doesn't automatically mean lower council rates or land tax. Three property experts explain how land valuations work, why tax bills can lag market movements, and what homeowners can do if they believe their valuation is wrong.

Aussie property owners pay tens of millions of dollars in state and territory land taxes and local council rates every year.

But these levies are influenced by property values, so will the recent fall in real estate prices mean some relief from these charges?

To find out what owners can expect, we asked three residential property experts:

• Melissa Barlas, founder of Conveyed conveyancing
• Mathew Tiller, head of research and business intelligence at LJ Hooker
• Dr Cameron Murray, chief economist at Fresh Economic Thinking

1. What is land tax?

Melissa Barlas: Land tax is an annual state or territory government tax levied on the ownership of land, based on its total taxable value. It's separate from council rates and from stamp duty, which is a one-off tax paid on purchase.

2. How is it calculated?

Mathew Tiller: It's not a federal government tax, which is why the rules are different across Australia... the main thing to understand is that land tax is generally based on the value of the land only, not the full market value of the property including the house.

Dr Cameron Murray: It's a tax on the unimproved value of the land. It's not how much your home would sell for, it's how much, if your house burnt down, your empty block would sell for... [there are] a variety of exclusions for owner-occupiers and low-value holdings. For example, in Queensland, you have to own at least $600,000 of residential land that's not your principal place of residence to start falling into the land tax bracket.

3. Who pays land tax?

Melissa Barlas: Owners of land that isn't their principal place of residence, investment properties, holiday homes, vacant land and commercial land, generally pay it once the total value of their landholdings in that state exceeds the threshold. Most owner-occupied homes are exempt (thresholds and exemption rules vary by state). Foreign owners often pay an additional surcharge.

4. How is the government-assessed land value different to the market value of a residential property?

Mathew Tiller: This is one of the biggest sources of confusion around land tax. A property's market value and its government land value are not meant to be the same number. A property could have a market value of $1 million, while its government assessed land value may be considerably lower.

Melissa Barlas: The government valuation (often called unimproved or site value) values the land only, it strips out the house, granny flat, pool and any other improvements. Market value is what a buyer would actually pay for the land and everything built on it.

5. How do government land values influence council rates?

Mathew Tiller: Official property valuations can be used when councils calculate rates, but the approach varies across Australia... your rates bill is not simply a tax on the value of your property. Councils usually work out how much revenue they need to raise, then share that cost across properties using their rating system. Property values can influence that calculation, but so can rating categories, minimum rates, service charges and other council charges.

6. There's been talk of property market prices falling in Australia - will this affect official land values and therefore land tax?

Melissa Barlas: Eventually, but with a lag. Valuations in several states are based on multi-year averages or periodic revaluation cycles, so a market downturn doesn't show up immediately, it needs to be sustained across a full valuation cycle to meaningfully pull down official land values.

Mathew Tiller: Even if the assessed land value falls, the land tax bill may not fall by the same amount. Tax rates, ownership structures, exemptions and the treatment of multiple properties can all affect the final bill.

Dr Cameron Murray: Depending which state you live in, they might not go down. The [tax] rates might go up, even if your land value goes down. For example, if you're in Victoria, they might want to not give up that tax revenue, given their budget tightness.

7. Will falling property market prices lead to lower council rates?

Melissa Barlas: Not automatically, no... because council rates are ultimately a budget-allocation tool, not a direct percentage of your property's value.

Mathew Tiller: Councils need to raise money to provide local services, infrastructure and facilities. Property valuations are used as part of the system to work out how that cost is shared between properties... but if property values fall across an entire council area, the council may still need to raise a similar amount of money. Everyone's property might be worth less, but that does not automatically mean everyone's rates bill will fall.

8. What recourse do property owners have if they believe their government-assessed land valuation is too high?

Melissa Barlas: Owners can lodge a formal objection with the relevant valuation authority... supported by independent valuation evidence or recent comparable sales. If the objection is rejected, most states allow a further appeal to a tribunal or court.

Mathew Tiller: Timeframes vary across states and territories... but the key point is to act quickly. These processes usually have strict deadlines, so owners should not leave it too late if they think the valuation is wrong. It is also worth checking whether land tax or council rates still need to be paid while an objection is being reviewed.

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