Recent updates to land tax adjustments in REIQ contracts

Are you aware that there have been important updates to the standard REIQ contracts for both residential and commercial property transactions, specifically relating to how land tax is handled at settlement?

A simple tick of a box in a standard contract can now cost a buyer, and save a seller, hundreds (or in some cases a few thousand) dollars through a pro-rata adjustment of land tax at settlement.

What are the new land tax options?

The new contracts provide three clear options for how land tax is to be handled:

1. No adjustment for land tax:

The seller pays the full year’s land tax (if applicable), and the buyer makes no contribution. This option is straightforward and eliminates the need for any apportionment between the parties for land tax. This has always been in the contract in residential sales and purchases and is what we would usually recommend to a buyer, but not to a seller.

Generally, this option is the best option for a buyer as you can take ownership of a property and not have to pay any portion of that year’s land tax.

2. Adjustment on a single-holding basis:

Land tax is calculated as if the property being sold is the seller’s only landholding based on the property’s value. The amount is then apportioned between the parties based on how many days each owns the property during the relevant land tax year. This is the same as other adjustments such as rates and water and body corporate levies, however land tax starts at the 1^st day of July each year and ends on the 30^th of June the next. Other outgoings are usually quarterly or half yearly.

Sellers should be cautious with this option. If you own multiple properties but this particular property does not meet the land tax threshold, land tax will not be apportioned between the parties.

This option is generally, the ‘meet in the middle option’ for both parties.

3. Adjustment based on sellers’ actual liability:

Land tax is calculated on the seller’s actual land tax assessment (which may include multiple properties a seller owns). The buyer then contributes a proportional share based on the seller’s land tax assessment, which can sometimes mean the buyer pays more than they would under the single holding method.

This option is generally the most favourable for land tax–paying sellers, as it may result in the seller paying less than they would under a single-holding adjustment, while still ensuring the property’s land tax is apportioned between the parties. Even though less funds may be collected by the sellers, this is still generally the best option for sellers because some properties may not meet the land tax threshold on their own.

These options are now included in the contract schedule, and the parties must select their preferred approach before signing.

What happens if no option is selected?

If neither party selects a land tax adjustment option, the default position is that no adjustments for land tax will be made, and the seller will be responsible for the full amount of land tax assessed for the property for the current land tax year.

Sellers should be particularly mindful of this, as you could end up paying a full year’s land tax even if settlement occurs early in the financial year.

For investors, this could save thousands in land tax before the next financial year.

When does land tax not need to be adjusted, or an option selected?

Under the standard REIQ contract, land tax adjustment is not required when:

• The seller is selling their principal place of residence; or
• The property being sold is exempt from land tax. Some examples of exemptions include land owned by certain charitable or government entities.

Land tax liability can also be deleted from a contract, so it’s important to also watch out for any amendments to the standard terms in the special conditions page of the contract

Why does this change to land tax matter?

In practice, this change means sellers must proactively decide how they want land tax to be handled and ensure the correct option is completed in the schedule.

While land tax adjustments are common in commercial transactions, they have often been avoided in residential contracts. It is now important for both parties to understand the implications of each selection under the contract.

Buyers must carefully review the land tax section before signing, as some adjustment methods could significantly increase their settlement costs. Adjustments based on a single-holding basis or on the seller’s actual liability may raise the balance of the purchase price more than expected, especially if the seller’s total property holdings are not fully disclosed or easily verified.

How should you proceed?

Sellers should:

• Confirm your land tax status and likely assessment before signing the contract;
• Decide which adjustment method best suits your circumstances;
• Ensure the chosen option is correctly marked in the contract schedule; and
• Be aware that if you leave this section blank, you’ll be liable for the full year’s tax, without obtaining any sort of pro-rata reimbursement by the buyer

Buyers should:

• Check which land tax option is selected before signing;
• Factor any potential land tax contribution into your settlement budget; and
• If the “actual liability” method is selected, request disclosure of the seller’s full land tax assessment before signing a contract.

These new land tax provisions in the updated REIQ contracts provide clarity and flexibility, however they still also require careful attention and understanding all parties.

If you have any questions about how these changes may affect your transaction or you would like advice on completing the new land tax section of the REIQ residential and commercial contracts correctly, please contact our team today.