Prospective purchasers are often so caught up in the excitement of purchasing their new home that they can fail to properly consider their liability for all hidden costs and adjustments. One of these hidden nasties is land tax.

Land tax is assessed as at 31 December each year. Liability is determined on the basis of who owns the land at the time. Nearly all contracts of sale provide that an adjustment of this liability will be made as at the date of settlement of the sale.

Ideally a land tax clearance certificate is attached to the s32 (vendor’s statement) which shows not only the vendor’s total liability for land tax in a given year but also the land tax liability on the basis of the property being the only property owned by the vendor. This latter assessment is usually the amount that is adjusted.

Quite frequently, however, the s32 does not include a land tax clearance certificate so that liability for land tax remains unclear.

The ability under the Sale of Land Act 1962 to provide a statement to the effect that outgoings do not exceed a certain amount means that the land tax liability may not be specifically disclosed to a prospective purchaser. This can lead to significant problems.

One problem arises when the purchaser is purchasing the property as their principal place of residence. Usually there would be an exemption from land tax if the property is the owner’s principal place of residence. Unless the property is tenanted, a purchaser usually assumes that the property is the vendor’s principal place of residence. Often it is, but it is still prudent to check.

Similarly, there is an adjustment to be made if the owner is holding the property on trust. The State Revenue Office imposes a surcharge for property held in a trust and this surcharge is also adjustable.

Purchasing adjoining or multiple properties from a vendor under one contract can also trap the unwary. The land tax clearance certificate provides for single ownership calculations. The contract of sale (LIV copyright version) provides that for adjustment purposes the land is treated as the only land of which the vendor is owner (as defined in the Land Tax Act 2005) which means that land tax is adjusted on the aggregate value of the total land purchased, not each individual lot, on the single ownership basis.

Timing also affects land tax liability. Contracts that are entered into before 31 December with settlement due in the new year can hide nasties at settlement time.

Quite often a vendor will hold the property as their place of principal residence and therefore it is not liable to land tax. However, after sale but before 31 December the vendor may acquire another property as their principal place of residence, thereby rendering the subject property liable to land tax assessment. If the property is a substantial one, a significant amount of land tax may apply.

Usually settlement will take place in the early part of the year, rendering the unsuspecting purchaser liable for the bulk of this tax.

As a final warning, remember that as purchaser you are not entitled to the benefit of any concessions to which the vendor may be eligible, even if you are also entitled to a concession.

The message is clear – always be aware of the full costs associated with buying your dream home. A lawyer can assist you in identifying any potential hidden costs and liabilities. Getting advice early may prove to be a wise investment.