Forum Replies Created
Wayne,
Your cost base is made up of buying costs such as stamp duty and selling costs such as commission plus holding costs such as rates. Travel costs cannot be included in any of these.
The capital gain is the difference between the selling price and the cost base. You can deduct from this any capital losses on other assets then half it for the 50% CGT discount.
Assuming the property is in joint names and the difference between the selling price and the cost base is $90,000 the taxable amount would be $45,000 if you have no other capital losses. That is $22,500 to each of your parents. Your mother would pay 31.5% on this ie $7,087. Your father would pay 18.5% on the first $14,840 and 31.5% on the rest. His total tax would be $5,158. Your parents’ combined total tax would be $12,245.
If you think this is too much your father could consider making a contribution to super and your mother could salary sacrifice her wage into super. The super contributions would be taxed at 15% in the superfund’s hands but this is still better than their marginal tax rates.Julia Hartman
[email protected]
http://www.banacs.com.auttam,
Go to http://www.bantacs.com.au under tools you will find information on evaluating a rental property that will help you with the numbers. Also under free publications is a rental property booklet.Julia Hartman
[email protected]
http://www.bantacs.com.auIboffer,
Be careful before you remove money from a super fund. While it is in super its earnings are only taxed 15% and CGT is only 10%. If you roll it over to a pension it could be tax free.Maybe just Maybe consider setting up your own self managed super fund so you have more flexability in what you can invest in. But you cannot buy domestic properties off yourself and a SMSF cannot borrow.
Julia Hartman
[email protected]
http://www.bantacs.com.auKJW,
There are a lot of buz words out there that I don’t understand my 18 year old son informs me. I have not read the book but my idea of a positive cash flow property is one that covers its own cost and leaves a little over in cold hard cash. Then of course the capital gain is the icing on the cake.
To work out a positive cashflow you need to only look at the cashflow items and one of those items may be your tax refund cheque if the property is negatively geared for tax purposes. You may well ask how can a property that is negative for tax purposes leave you with money in the bank. This is where depreciation comes in. Depreciation is tax deductible but does not cost you any cash at the time. For example assume:
Rent $15,000
Less
Repairs, Agent Fees, Rates Insurance etc 4,000
Interest 10,000
Depreciation 2,000
Loss for tax purposes 1,000
If in Max Tax Bracket refund will be 485Now the cashflow calculation
In
Rent 15,000
Tax refund 485Out
Repairs, Rates, Insurance, Agent fees etc 4,000
Interest 10,000Net Cash Inflow $1,485
Problems are:
1) Need a big deposit to get interest so low relative to rent or look to remote areas where little or no capital gain.
2) The building depreciation will reduce your cost base when you sell if purchase the property after 13th May 1997
3) To be in the maximum tax bracket you need to earn over %70,000 this year after deducting the rental loss. Next year the maximum threshold is $80,000.Julia Hartman
[email protected]
http://www.bantacs.com.auDNL,
The kids won’t cop CGT if the property is held in your name either. CGT only applies when the property is sold regardless of whether it is held by a trust or individual.
Nevertheless when you line up all the pros and cons you will probably find a discretionary trust is the best. Mainly because of the flexability in who pays the tax on the income or capital gain.
Another very important consideration is not being able to distribute losses to beneficiaries. This goes against trust and pro individuals. Very important these days when a really large deposit is necessary to get most properties postitively geared.Julia Hartman
[email protected]
http://www.bantacs.com.auJust Allan,
137/157 of the interest on the loan will be deductible against the rent. The other 20/157ths is only deducitble if the car is used to produce income.
If the car is not income producing I suggest you split the loan when you move out. Get a loan for $137,000 on interest only and another for $20,000 P&I. Concentrate on paying off the smaller loan.
As for what to tell your accountant. You sign the tax return to take responsability.Julia Hartman
[email protected]
http://www.bantacs.com.auDNL,
Sounds like your Accountant was talking about a superannuation fund as that is exactly the problem with holding property in a superfund. Maybe there was just a breakdown in communications. But regarding any you do own outright and don’t mind your money being locked away until you are 55 a superfund is the most tax effective place to keep them.
Mortgage advisor – the government gets it wrong a lot more often than the professionals. Check the professionals qualifications. CPAs and Chartered Accountants have to do a degree and several years study with their professional body before they qualify. Staff at the ATO start out on the phones after a 6 week course even if they have no relevant experience before joining the ATO.
Julia Hartman
[email protected]
http://www.bantacs.com.auCrownOfGold,
Section 118-145 allows you to exempt it as your main residence for up to 6 years after you moved out as you can choose not to have your parents place considered your main residence. There is no time limit for tax purposes as to how long you have to live there but you must have moved in as soon as practical after settlement. TD51 describes what the ATO considers relevant in deciding whether you have set up your main residence. You have covered it pretty well.
Julia Hartman
[email protected]
http://www.bantacs.com.aug7,
The more frequently you do it the more likely you are to be considered in business by the ATO. This is not necessarily a bad thing. If you are going to turn the properties over in less than 12 months you will not get the CGT 50% discount so there is no benefit to you in trying to come under the CGT provisions. On the otherhand if you are in the business of buying and selling houses you will be able to claim a tax deduction for items not included if CGT applies. For example telephone and motor vehicle costs. Another advantage is if the property makes a loss you will be able to offset this against any other income. Losses caught under the CGT laws are quarantined to only be offset against other capital gains. But the big catch is GST. Using the margin scheme will minimise its impact. You need to do the numbers on each house but the disadvantages of GST probably out weigh the advantages of being in business.
Sorry I can see this has created more questions for you than answers. The main point is if you do this in a business like manner and frequently you will be considered a business by the ATO anyway.Julia Hartman
[email protected]
http://www.bantacs.com.auJust Allan,
Terry is correct but just a word of warning:
Traditionally, interest is claimable only on a loan where the actual money borrowed is used directly to produce income i.e. buy the income producing property.
It is dangerous to use a line of credit facility on a rental property loan when you will be drawing funds back out to pay private expenses. Based on the principle that the interest on a loan is tax deductible if the money was borrowed for income producing purposes, the interest on a line of credit could easily become non-deductible within 5 years. For example: A $100,000 loan used solely to purchase a rental property is financed as a line of credit. To pay the loan off sooner the borrower deposits his or her monthly pay of $2,000 into the loan account and lives off his or her credit card which has up to 55 days interest-free on purchases. The Commissioner now considers there to be $98,000 owing on the rental property. In say 45 days when the borrower withdraws $1,000 to pay off his or her credit card the loan will be for $99,000. However, as the extra $1,000 was borrowed to pay a private expense, viz the credit card, now 1/99 or 1% of the interest is not tax deductible.
The next time the borrower puts his or her $2,000 pay packet into the account the Commissioner deems it to be paying only 1/99 off the non-deductible portion i.e. at this point there is $96,020 owing on the house and $980 owing for non-deductible purposes. When, 45 days later, the borrower takes another $1,000 out to pay the credit card, there will $96,020 owing on the house and $1,980 owing for non-deductible purposes so now only 98% of the loan is deductible, etc, etc.
In addition to the loss of deductibility, the accounting fees for calculating the percentage deductible could be high if there are frequent transactions to the account. The ATO has released TR2000/2 which confirms this and as it is just a confirmation of the law it is retrospective.
To ensure deductibility and maximise the benefits provided by a line of credit you will need an offset account that provides you with $ for $ credit. These are two separate accounts – one a loan and the other a cheque or savings account. Whenever the bank charges you interest on the amount outstanding on your loan they look at the whole amount you owe the bank i.e. your loan less any funds in the savings or cheque account. This type of account is offered by several banks.
A loan setup incorrectly will lose all deductibility within 5 years on average. If your loan is not set up correctly it is important that you act to change it immediately as every day erodes your interest deduction.Julia Hartman
[email protected]
http://www.bantacs.com.auAmbo72,
Repairs and Maintenance, not improvements are deductible. For example if the house needed painting when you bought it then painting it would be an improvement or if the house did not have a garden hose then purchasing one would be an improvement, therefore not deductible. On the other hand if during the time of your ownership the hose wears out and you replace it or the paint starts to peel and you repaint, these expenses would be a deduction. No deduction is available for your own labour. Take care to perform repairs only when the premises are tenanted or in a period where the property will be tenanted before and after with no private use in the middle (IT180). Do not make repairs in a financial year during which you may not receive any rental income (IT180). If a property is used only as a rental property during the whole year then a repair would be fully deductible even though some of the damage may have been done in previous years when the property was used for private purposes (TR 97/23). Note this does not apply if the damage was done in a period you did not own the property. If the state of disrepair the property was in at the time you purchased it is directly responsible for further damage when you own it, all the repairs relating to that damage are considered improvements (Law Shipping Co. UK). A repair can become an improvement if it does not restore things to their original state (case M60) i.e. replacing a metal roof with tiles. The whole cost of the tiled roof would be an improvement and no deduction would be available for what it would have cost you to put up another metal roof. But a change is not always an improvement. In ID 2002/330 the ATO states that the cost of removing carpets and polishing the existing floorboards is deductible. Yet in ID 2001/30 underpinning due to subsidence was considered by the ATO to be an improvement not a repair. It is not necessary to use the original materials to restore the thing or structure to its original state. Modern materials can be used even when these might be a slight improvement because they are more efficient. As long as the benefit is only minor or incidental it can still be considered a repair.
Work that replaces the whole thing or structure is an improvement not a repair. So don’t pull down all of the old fence and replace it just replace the damaged area. TR 97/23 recognises that eventually the whole thing or structure may be replaced in a progression of repairs. These repairs are still deductible providing each repair is on a small scale, the progression is over a long period of time and that it is not just in reality a replacement done over time but individual repairs.
Tree removal is claimable if the tress have become diseased or infested during the time of ownership. Removal is also claimable if the tree is causing damage such as roots interfering with pipes and the damage was not present when you purchased the property. If a tree is removed because it may cause damage in the future or you are fed up with the leaf litter that has always happened since you bought the property, then you are making an improvement which is not deductible.
Note improvements that are still present when the property is sold can increase your cost base for CGT purposes.Julia Hartman
[email protected]
http://www.bantacs.com.auUKman,
Assuming you are a resident of Australia for tax purposes you can negatively gear an overseas investment but only up to the total amount of interest payable. In ID2002/764 the ATO clearly states that, from 1st July, 2001 Section 160AFD allows the interest, borrowing costs etc. on an overseas rental property to be offset against Australian income to the extent that it exceeds the overseas rent received. For example if all expenses other than interest result in a profit on the property of $1,000 but the interest is $9,000 you are entitled to reduce your Australian taxable income by $8,000, If on the other hand the property runs at a $1,000 loss before interest and the interest is $9,000 you are only entitled to offset $9,000 against your Australian income.
The calculation the loss on the rental property is in accordance with Australian tax law. Therefore it is relevant in your considerations how carpet vs timber floors are treated for tax purposes. The cost of the carpet must be depreciated over 10 years whereas restoring the floor boards is imediately deductible as a repair according to ID 2002/330
On my web site http://www.bantacs.com.au there is a booklet called overseas that may interest you.Julia Hartman
[email protected]Showmethemoney,
You should use the trust’s ABN never the company’s but you may need to use the company’s ACN to identify it.
Try to look at a trust/trustee relationship similar to being the executor of a will. If you were my executor and sold my house the contract would be in my name as that is still the name on the title deed. I can’t sign as I am no longer a legal entity. So you the trustee would sign and you would have to identify yourself. Similarly a trust is not a legal entity so the trustee co must sign.
Be careful to alway use ATF so there can be no confusion.Julia Hartman
[email protected]
http://www.bantacs.com.auScotty3
The quick answer is neither if the property is held as trading stock ie not subject to CGT. This is because the expenditure is revenue in nature not capital so deprn cannot apply. ID 2003/377.
If the sale is going to be subject to
CGT then the person providing the vendor finance, the sellor, can claim the depreciation because that still have the legal interest until settlement.To decide whether the property is trading stock (revenue in nature) or an asset subject to CGT consider the following:
Typical Features of a Wrap (Vendor Finance Arrangement)
1) The purchaser pays a deposit at the time of entering into the arrangement.
2) The settlement (change of the title deed to the purchaser) does not take place for several years after the arrangement is entered into.
3) The purchaser has the right to occupy the property prior to settlement
4) The purchaser pays a weekly amount (regardless of the name it is given in the arrangement) for the right to occupy the property
5) As part of the arrangement the purchaser pays the rates, taxes and insurances on the property.
6) The balance of the purchase price to be paid on settlement of the arrangement is reduced by the weekly instalments.
7) If the purchaser fails to complete the arrangement the deposit and weekly instalments are forfeited.Now what about the profit on the sale of the property? Is that normal income or capital gain and when is it taxable? Assuming an agreement similar to that described above the answer to this question revolves around whether the vendor is in the business of selling houses or an investor just realising an investment. The key issues in differentiating here, according to ID2004/25, 26 & 27 are:
1) The Vendor did not use the property for any other purpose than to enter into the wrap. A straight rental of a property before entering into a wrap arrangement would avoid this point.
2) The property was sold at a profit
3) The wrap arrangement was entered into within 6 months of the vendor purchasing the property.
4) The Vendor is in the business of purchasing properties to resell. It would be difficult for the ATO to argue this case if the Vendor only bought and sold one property.If you are caught by all of the above then CGT cannot apply to the sale of the property as the profit on the sale is revenue in nature. If a transaction is caught as income, CGT does not apply or in other words CGT is the last option if income tax doesn’t catch it.
As stated above if CGT does not apply you cannot claim depreciation.
Julia Hartman
[email protected]
http://www.bantacs.com.auSmethem,
Yes to your questions. If you would like more info on how non residents are treated, down load my Overseas booklet from the free publications page on http://www.bantacs.com.auJulia Hartman
[email protected]Regrow,
Tax is payable after you have done the tax return for the year you signed the agreement to sell.
Julia Hartman
[email protected]
http://www.bantacs.com.auKP,
You would have to live in the new residence for 3 months and as long as there wasn’t more than 4 years between demolishing & moving into the new one and you didn’t use your main residence exemption on another house during that time you would get the CGT exemption on the new house. But no CGT exemption on the other new house.
Julia Hartman
[email protected]
http://www.bantacs.com.auRegrow,
You can only exempt a dwelling as your PPOR and only if you did actually live there even if only for a short period of time and you don’t want to exempt a house in Melbourne with your PPOR as you can only have one.
The catch here is the word dwelling. I assume you never got to build on it so it was just vacant land. If you had lived in a caravan on it and the caravan was still on it when you sold it then you could utilise the exemption.
Mention section 118-110 and 118-115 to your accountant. You are the one that signs the tax return to say it is correct. You will still cop a penalty from the ATO if it is wrong.Julia Hartman
[email protected]
http://www.bantacs.com.auWayne,
If you have lived in this house and will be selling it as vacant land you will lose your main residence exemption completely.Julia Hartman
[email protected]
http://www.bantacs.com.auBlondie,
Its not a book just a booklet but it is free. Go to http://www.bantacs.com.au to free publications and download the rental property booklet.
Julia Hartman
[email protected]
