In conveyancing in New South Wales, land tax adjustments can be heated subjects of negotiation – particularly at the end of the year. A land tax adjustment is a contractual agreement between a buyer and seller of property, whereby the buyer reimburses a seller for any land tax they’ve paid throughout the year.
The adjustment is applicable even if the buyer themselves are normally exempt from paying land tax e.g. if the relevant property is (or willbe) their principal place of residence.
Why would the vendor ask the buyer to pay their land tax for them? Well, don’t blame the vendor, blame the Office of State Revenue!
Land Tax is a tax on the value of any individual's andholdings, other than their principal place of residence. In NSW, it is levied at the stroke of midnight on 1 January every year, and you are required to pay your entire year’s worth of land tax in advance in one go.
Importantly, you do not get a refund of land tax you’ve paid if you cease owning the land half way through the year. The Office of State Revenue effectively invites you to sort out that yourself with the purchaser, which is the idea behind a land tax adjustment.
Here’s an example:
A vendor owns an investment property in Marsden Park. As it’s not her principal place of residence, she is liable to pay land tax on 1 January in an amount of $10,000. The vendor pays her land tax at the beginning of the year but decides to sell the property on 30 June (i.e. precisely half waythrough the year). If her solicitor put a land tax adjustment in the contract,the buyer would be liable to pay an extra $5,000 (i.e. 50% of $10,000) at settlement as a reimbursement for that part of the year that the vendor has paid land tax but hasn’t the property.
Importantly, the buyer has to pay that amount, even if they are not otherwise liable to pay land tax.
Why does it matter more at this time of year, towards Christmas?
Because, if settlement of the transactions falls over to January 2023 (which most do given the standard 42 day settlement period in NSW), then the buyer would be effectively liable to pay the whole year’s land tax for the vendor. In other words, the quantum of the adjustment becomes a lot bigger.
Of course, if the parties manage to settle on 31 December 2022,the land tax adjustment would be close to zero.
Land tax adjustments can be a nasty shock to buyers so keep a look out for them in your contracts. If they can’t be negotiated out, then buyers should factor the land tax adjustment into their offering price or try and settle before 31 December.