TAXATION PLANNING & RENTAL PROPERTIES
Deductibility of Property Seminars
Property seminars are deductible if related to current income producing activities ie. existing property owner, not if related to future income producing activities.
Purchase cost of Property
- Allocate part of the purchase cost to depreciation assets
- Deductions for capital works – building write off
- Cost base expense for CGT
Quantity surveyors report is required for 1. & 2 and a capital gains register is required to record all three.
Bank Guarantees and deposit bonds
Bank Guarantees – the payment of fees to a bank to guarantee a deposit for a property is not deductible as an expense of a capital nature. These cannot be considered a borrowing cost either but could form part of the cost base.
Deposit Bond – payment to an insurer is similar to the above, ie. not deductible as expense of a capital nature. Could form part of the cost base.
Mortgage Insurance is not deductible as it is capital in nature. It can be written off as a borrowing cost over five years.
Repairs to property previously used for private purposes
A taxpayer can claim a deduction for repairs, where a taxpayer holds a property for income-producing purposes at the time that the repair expenditure is incurred, even through the taxpayer may have previously held the property for non-income producing purposes.
Depreciation and Building Write Off
Some quantity surveyors issue reports that contain incorrect classifications of certain expenditure. The ATO has advised that practitioners should not simply accept all the tax claims outlined in a quantity surveyor’s report. There is a list on the ATO website under Individuals/Deductions checklist/Rental expenses/ Rental property expenses.
Cost base and Div 43 claims
Where rental property is acquired after 7:30pm on 13 May 1997, the cost base is reduced by any part of the construction expenditure allowed or allowable as a deduction under Div 43.
Cost of hiring furniture to increase sale price
Where the vendor hires furniture to make the property more appealing to, hopefully, increase the sale value, the cost of hiring the furniture is not deductible nor can it increase the cost base for CGT purposes.
OTHER TAX ISSUES FOR RENTAL PROPERTIES
GST issues if a tenant uses a house for business purposes
The ATO takes the view that if the premises are not actually being occupied as a residence, then they will still be residential premises if they are still capable of being occupied as a residence and have not been physically converted to commercial premises.
Individual taxpayers can still access the prepayment rules. Taxpayers can still prepay interest and accounting fees. Note: taxpayers can only prepay interest if there is a reason for doing so, other than obtaining a tax deduction eg. lowers interest rate for prepaying.
MAIN RESIDENCE EXEMPTION
Subdividing and selling pre CGT vacant land
A subdivision retains pre CGT status, however any capital improvement after 20 September 1985 will be treated as a separate asset and subject to CGT if the cost base of the improvements:
- Is greater than the threshold ($104,377) 2004 year
- Exceed 5% of the capital proceeds received in respect of the CGT event happening to the asset to which improvement was made.
Note: pre CGT property can still be assessable as ordinary income depending on the intent of the taxpayer at the time of purchasing the property.
Subdividing and selling post CGT vacant land
A CGT event does not arise until the land is sold. Land retains its original acquisition date.
Main residence exemption
The main residence exemption will not apply to any capital gain on the vacant block id it is being sold separately to the dwelling. However, if after subdivision, both blocks are sold, the main residence exemption will apply. The vacant block can be adjacent to the main residence and retain the exemption.
Building house on subdivided block and selling it
Where a taxpayer subdivides the family home, intending to build a house on the vacant block, to be sold at a profit, the transaction will be assessable as ordinary income as well as CGT. The sale will also be subject to GST, as the sale will be of new residential premises and the taxpayer is likely to meet the requirement to register for GST. The transaction goes beyond merely realising an asset.
The CGT provisions will also apply. The taxpayer will be entitled to a discount, provided the land has been held for more than twelve months. The construction date is normally irrelevant.
If a house is built on pre CGT land, the structure is a separate asset to the land for CGT purposes and the acquisition date is the date the contract for construction was entered into.
As stated previously, the construction of a house on subdivided land is a supply of new residential premises and will not be an input taxed supply. The taxpayer may apply the Margin Scheme if they wish.
MINIMISING TAX ON THE FAMILY HOME
Knocking down an existing home and rebuilding
A taxpayer can retain the main residence exemption for up to four years before it becomes their main residence provided:
The completed dwelling must become the taxpayer’s main residence as soon as practicable after the construction is completed and,
It must continue for at least three months
Care must be taken when taxpayer buys, renovates and sells numerous properties, as the activities could take on the nature of a business or profit making scheme and not the mere realisation of an asset.
Tax planning opportunity – six year rule
Taxpayers can elect to treat a property as their main residence for a period of up to six years:
- Where it is used for income producing purposes and
- For an indefinite period where it is not used for income producing purposes.
The six years can be extended if the taxpayer re establishes the property as their main residence prior to the duration of the 6-year period. The choice to apply the 6-year rule need only be made in the year the dwelling was sold.
Generally, a taxpayer is only allowed one main residence exemption but may have two dwellings for a period of 6months when buying and selling residences.
Making your residence a previously rented property
Upon selling a residence previously used as an investment property will be subject to Capital Gains Tax on a prorate basis. That is if the property was rented for 5 years and your residence for 5 years, then 50% of the capital Gain would be subject to capital gain.