Breaking Down Property Taxes: How $1M in Real Estate Creates $300k for the Government

The government makes a lot of money on property in Australia.

But just how much does the government make?

We ran the numbers through the journey of a fictional $1 million home over three years, transitioning through three different ownerships.

Our calculation: $305,000

If you want to see how the money is made, read on.

Overview

Our analysis sheds light on the taxes levied by the Australian government at each stage of a property's life cycle.

We have used three distinct stages of ownership:

1. Purchase and construction of the home
2. Sale to an investor and three years as a rental
3. Sale to an international buyer

Now we are clear on the process, let's look at the numbers.

#1. Land Purchase and Construction

Our story begins with the acquisition of land in New South Wales (NSW) and the subsequent construction of a residential home.

Let's assume the developer makes no profit and just breaks even on $1 million invested.

Assumptions

• Land Cost: $500,000
• Stamp Duty: Using a simplified NSW stamp rate of 4% for the land purchase
• Construction Cost (including GST): $500,000
• GST on Construction: 10%

Tax Payable by First Owner ($70,000)

The initial phase includes purchasing land and constructing a home, with a focus on GST and stamp duty costs.

• Stamp Duty on Land: $500,000 * 4% = $20,000
• GST on Construction: $500,000 * 10% = $50,000

#2. Rental by Second Owner

Next, the property is purchased by an Australian investor aiming to rent it out.

This phase introduces stamp duty again, and some new tax considerations including rental income tax, and annual property-related taxes over the ownership period.

Assumptions

• Purchase Price: $1 million
• Stamp Duty: 4% of the purchase price
• Rental Income: $50,000 per year
• Income Tax on Rental: assuming a 30% tax rate
• Annual Council Rates: $3,000
• Sale Price: $1.2 million with capital gain of $200,000

Tax Payable by Second Owner ($134,000)

The property is rented out at $50,000 a year, with the investor paying stamp duty upon purchase, and income tax, and council rates over the three-year period.

• Stamp Duty on Purchase: $1 million * 4% = $40,000
• Annual Rental Income Tax: $50,000 * 30% = $15,000 per year, totaling $45,000 over three years.
• Total Council Rates (Over 3 Years): $3,000 * 3 = $9,000
• Capital Gains Tax: assuming a rate of 20% = $40,000

#3. Purchase by the Third Owner 

The property is sold for $1.2 million to an international buyer, introducing FIRB fees.

Assumptions

• Stamp Duty: 4% of the purchase price
• Foreign Owner Surcharge Stamp Duty: an additional 4% on the purchase price (which can go as high as 7% in Queensland)
• FIRB Fees: a fixed $5,000 for the international buyer

Tax Payable by Third Owner ($101,000)

• Stamp Duty for Third Owner: $1.2 million * 4% = $48,000
• Foreign Owner Surcharge Stamp Duty: $1.2 million * 4% = $48,000
• FIRB Fees for Third Owner: $5,000

Additionally, foreign owners do not benefit from the land tax threshold exemption and are subject to the full land tax rate, making these numbers even higher.

Overall Tax Contributions

Now that we have covered the three transfers, let's look at the total cost:

When we slice the data differently and view it through a doughnut chart, we see that stamp duty takes up 51% of the share, followed by GST and the foreign owner surcharge.

Conclusion

Australia is a safe, welcoming, and incredible country, and all these taxes contribute to ensuring it remains that way.

This journey not only highlights the significant contribution of property taxes to government revenue but also offers valuable insights for investors, homeowners, and policymakers alike. You want to focus on what matters, with the most significant by far being Stamp, Income Tax and GST.

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