Land tax charges and mortgage priority

Why lenders care about land tax

Most borrowers think of land tax as a bill to pay each year. Lenders think of it as a potential threat to their security. In the states that levy it, unpaid land tax can become a charge on the land. Depending on the legislation, that charge may take priority over other interests, including a registered mortgage. If a borrower falls behind and the property is sold, the revenue office could be paid before the lender.

That is why land tax appears in almost every property loan: in pre-settlement searches, in conditions precedent, in covenants and in default triggers. Our lesson on mortgage ranking and priority explains how priority normally works, and this article covers the statutory exception.

Which jurisdictions levy land tax

Land tax is a state and territory tax. New South Wales, Victoria, Queensland, Western Australia, South Australia and Tasmania all levy land tax on certain land. The Australian Capital Territory levies land tax on some residential properties alongside general rates, while the Northern Territory does not levy a general land tax. Thresholds, rates, exemptions and assessment dates differ widely.

The relevant revenue offices are:

• Revenue NSW
• State Revenue Office Victoria
• Queensland Revenue Office
• RevenueWA
• RevenueSA
• State Revenue Office Tasmania
• ACT Revenue Office

Our stamp duty and land tax by state lesson gives an overview of each.

How the charge works

State land tax legislation generally provides that unpaid land tax, along with interest and penalties, is a charge on the land. The details vary, but common features include:

• the charge attaches to the land, not only to the owner personally;
• it can continue after the land is sold, which is why buyers check land tax;
• it may rank ahead of other interests, including mortgages registered earlier;
• the revenue office can take recovery action, including sale in some circumstances.

Because the charge follows the land, a lender cannot rely solely on the borrower's promise to pay. It needs to verify the position before lending and monitor it during the loan.

Searches and certificates at settlement

Before settlement, conveyancers and lenders usually obtain a land tax certificate or clearance from the revenue office. This shows whether any land tax is owing on the parcel. If tax is owing, it is typically paid out of settlement funds or the vendor must arrange release.

For refinances and private loans, the lender's solicitor will usually search land tax for the security property and may require the borrower to pay any arrears before funds are released. If you hold several properties, the land tax on your whole portfolio can be relevant, because assessments are often aggregated across all land you own.

Land tax covenants in loan documents

Loan documents commonly include promises such as:

• to pay land tax and other rates and taxes on time;
• to provide evidence of payment on request;
• to notify the lender of any assessment, objection or arrears;
• that failure to pay is an event of default.

These covenants matter because a default can trigger default interest and enforcement rights. Our guide to term sheet fees and default clauses explains how default terms work.

Special cases

Foreign owners. Several states charge surcharge land tax on residential land owned by foreign persons. This increases holding costs and the potential charge. See FIRB rules for foreign borrowers.

Trusts. Some states apply different thresholds or surcharges to land held in trusts. Lenders lending to trustee borrowers will check the trust's land tax position.

Developments. Land held for development may have no exemption, so land tax accrues during a long holding period. Factor this into feasibility, alongside GST covered in our guide to the GST margin scheme and development cashflow.

Second mortgages and caveats. A lender in second position is already behind the first mortgagee. A statutory land tax charge could push it further back. This is one reason second-ranking lenders are especially careful. Our article on caveat and second mortgage registration explains the security side.

Other statutory charges

Land tax is not the only government charge that can affect a lender. Council rates, water charges and some other statutory amounts can also become charges on land under state legislation. The lender's solicitor will usually search for these as part of the same pre-settlement process.

What borrowers can do

• Keep land tax assessments and receipts with your loan documents.
• Pay on time, or arrange a payment plan with the revenue office before arrears build.
• Tell your lender promptly if you receive an assessment you dispute.
• Ask your conveyancer to check land tax on any property you buy or refinance.
• Include land tax in your holding cost estimates for any development or investment.

A worked example

Jordan owns three investment properties in one state and applies for a private loan secured over one of them. Jordan has been paying land tax by instalments but missed the last one after a cashflow problem. The lender's solicitor obtains a land tax certificate for the security property, which shows an amount owing. Because the state's legislation makes unpaid land tax a charge on the land, the lender makes payment of the arrears a condition before funds are released. Part of the loan is paid directly to the revenue office at settlement, and Jordan receives the balance. The loan documents also require Jordan to provide proof of future land tax payments. By clearing the arrears at settlement, the lender protected its priority and Jordan avoided further interest and penalties.

Why aggregation matters

In most states, land tax is assessed on the combined value of all taxable land a person or entity owns, not on each property separately. That means the land tax attributable to one security property can depend on what else you own. When a lender looks at your land tax, it may ask for your full assessment notice rather than a figure for one property. If you buy more land during the loan, your land tax may rise, which can affect your cashflow and the lender's assessment of the risk.

Objections and disputes

If you believe a land tax assessment is wrong, each revenue office has a process for objections and reviews, with time limits. Lodging an objection does not usually remove the obligation to pay while it is considered, and unpaid amounts may still attract interest and remain a charge on the land. Tell your lender if you object, and keep copies of the objection and any decision. For complaints about the way an agency handled your matter, the relevant state ombudsman may be able to help.

Selling property with land tax owing

When you sell, the buyer's conveyancer will usually obtain a land tax certificate. If tax is owing, it is commonly paid from the sale proceeds at settlement so the buyer takes the land free of the charge. That reduces the money available to repay your lender, which matters if a sale is your exit. Our guide to exit strategies explains how lenders model net proceeds.

Further reading

• First mortgage private loans
• Second mortgage loans
• Exit strategy: refinance or sale
• Australia's private credit market