Forum Replies Created
Wake,
Steele’s case is the precident and it has been around for quiet a few years now without challange.
Julia Hartman
[email protected]
Visit http://www.bantacs.com.auSupa Freak,
Buy a property with the primary purpose to make a profit on resale CGT does not apply normal income tax does so no CGT discount.
Buy a property with the primary purpose of gain income from renting it out CGT applies on sale so if held for more than 12 months 50% discount (unless held by a Co.)
Trust or individual someone must pay tax on the profit. A trust is taxed at the maximum tax bracket unless the profits are distributed. If this is the case tax is paid at the beneficaries marginal rate.Heres the article on wraps you refer to Terry:
If the Vendor Finance arrangement has the following features the income stream received, once the wrap arrangement has begun, is considered to be principle and interest by the ATO. The income stream received before the wrap arrangement is entered into is considered rent. Reference ID2003/968.
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. But even if you weren’t caught by the above and CGT applied there would be no discount if the property was held for under 12 months. If you did hold the property for less than 12 months before entering into the wrap it is better to argue that you are in business and caught by the above because the profit on sale would be revenue in nature and as a result not assessable until settlement which could be 25 years away (ID2004/27). If you hold the property for less than 12 months but it is subject to CGT you don’t qualify for the discount but would be assessable on the profit when entering into the wrap.
Section 104-15(1) of ITAA 1997 states that a CGT event happens when the owner of a property enters into an arrangement with another party to allow them to live in the property and title may transfer at the end of the arrangement. Section 104-10(3) states that the time the CGT event happens is the time of entering into a contract for the disposal of the asset, not when settlement (title passes) takes place.
For example this means that the vendor who enters into a wrap on a property that has been previously used as a rental and held for more than 6 months will be subject to CGT on the property in the financial year the wrap agreement is entered into. Accordingly, if at this stage the property has not been held for 12 months no CGT discount will be available even if they eventually end up holding the property for 25 years under the arrangement.Disclaimer: Please note this information is general in nature and constantly changing so please don’t act on it without consulting your Accountant.
You do not have to include the capital gain in your tax return until settlement but you have to go back and amend the tax return for the year when you signed the contract. If you amend within 1 month of settlement there is no penalty.
If you can’t bantacs at least minimise it legally
Excellent answers Terry & Great Pig
Im not buying into the overseas trust or co issues as it is a mine field of double tax treaties and each country’s restriction on foriegn ownership, not to mention our controlled foreign entity rules.
But I would like to point out that minors do not qualify for the $6,000 tax free on passive income. The best they can hope for is the first $772 tax free but over that they are taxed at 66% until they get to $1,446 when the rate is dropped to 47%. Though there are concessions for orphans, compensation etc.Keep it up guys and you will put us accountants out of work.
If you can’t BAN TACS at least minimise it legally.
housemouse,
It is from the time you bought the land unless the land is pre 85.If you can BAN TACS at least minimise it legally
rylu,
Registered for GST must remit 1/11th of the business income as GST to the ATO unless the supply is exempt or input taxed such as domestic rents. Bonus to beng registered for GST is when you buy, if you are charged GST you can get it back from the ATO, but when you sell you pay 1/11th of the selling price to the ATO.Julia
Murph 33,
A positive cashflow property does not always result in a tax bill because it may not be positive for tax purposes. This can happen if you are able to claim building depreciation as a tax deduction. This is a tax return entry and does not effect your cash flow.julia
http://www.bantacs.com.auIf you can’t BAN TACS at least minimise it legally
Desktop,
I onced looked into a similar investment in Brisbane but decided not to go ahead because the motel chain could force me to refurbish the unit every 7 years. At a cost of $25,000. Nevertheless I watched the progress over the years with interest. It turned out that the company offering the guaranteed return had no assets so the guarantee was worthless. The market also became floated with similar investments so bought the prices down. Then once investors started to feel the pinch they started to try to get out, further bringing down prices.Julia Hartman
http://www.bantacs.com.auKay Henry,
Sorry on Queensland
Julia
How about a free seminar on rental properties. It is manly in relation to managing them and CGT consiquences. Further as I am a registered tax agent travel to listen to me is tax deductible anyway. The seminars start at 6.30pm at
Caboolture RSL Monday 27th Sept
Maroochydore RSL Tuesday 14th Sept
Please ring 07 54976777 so we know how many cuppas to have ready. Just the answers damn straight no personal development.Julia Hartman
http://www.bantacs.com.auIf you cant BAN TACS at least minimise it legally
Sorry I haven’t been on line for over a week. Good to see this topic is getting a lot of responses as it needs all the publicity it can get.
Bennido:
I think what Julia is saying is that for IP loans, having an offset account is better than LOC for tax simplification. You can move money in and out of the offset account without affecting the tax deductability status of the loan. While at the same time, reducing interest paid. Sorry if I misunderstood you, Julia !Yes you have got it in one.
I had a client who put the money from the sale of his home in the IP loan account for only a couple of weeks until he settled on his new home. He was so outraged when I told him he asked me to put in a ruling request to see if they would really be that unreasonable. The response from the ATO was bad news, the interest on the IP loan was no longer deductible.
A couple of weeks ago I applied to the ATO on behalf of a client who did nothing wrong his bank stuffed up by putting the money into the IP loan. I will let you know how that one comes out.
Yes it is ok to draw more money out for another investment property or to pay bills associated with the current IP.
If you sell a property you are only required to use the proceeds of the sale to pay off the portion of the debt associated with that rental property. Any funds left over can be used for private purposes.
On the otherhand if you sell the property for less than you owe you can continue to claim the balance of the loan as a tax deduction providing you stay within these guidelines:
1) All the proceeds of the sale should be used to repay as much of the loan as possible.
2) Endeavor to appear to be unable to repay the loan from other assets other than the family home. This may mean as a couple if only one member owned the property sold at a loss the other member should hold any further investments.
3) Don’t refinance the loan to extend its term or increase the interest rate. You must appear to be doing all that is possible to eliminate the loan. So refinancing to reduce the interest rate is ok. On the other hand if you have to change the loan from principle and interest to interest only because that is the only way you can afford the repayments you may be able to justify changing the loan.
4) If the loan is already fixed at the time the investment is sold, then you have an argument that you could not pay it out. This is a factor to consider if you are refinancing before the sale.The whole story is in the Claimable Loans Booklet on my web site http://www.bantacs.com.au
Julia Hartman
wayne12,
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.[email protected]
http://www.bantacs.com.auIf you can’t BAN TACS at least minimise it legally
WAZ11,
TD58 no main residence CGT exemption.
[email protected]
http://www.bantacs.com.auIf you can’t BANT TACS at lease minimise it letally
MasterREL,
You will not be slugged 30% tax on your initial investment if you are considered a share trader. Sure the value of the shares will be brought into account as a credit to closing stock but the original purchase will be brought into account as a debit to purchases. Thus cancelling each other out.
The biggest problem with buying investments in a company is it does not qualify for the 50% CGT discount.[email protected]
http://www.bantacs.com.auIf you can’t BAN TACS at least minimise it legally
ManicSquash,
Sorry, I know nothing of NZ laws but would like to point out that if the interest on the property exceeds the net of rent and other costs the difference is deductible in Aust. This has only been in for a few years before then it was quarantined.[email protected]
http://www.bantacs.com.auIf you can’t BAN TACS at least minimise it legally
jasonamurphy,
Confirmed today with peers that definately no main residence exemption for the sale of vacant land no matter how long you had a house on it. So CGT applies to the whole transaction but if you live on the land in a caravan and sell the caravan with the land you can rectify the situation. Watch the Sunday Mail for me having a winge about this one. Thanks for the idea.
Benindo,
The capital works depreciation does not qualify for the $300 write off so it is 2.5% over 40 years.bennido,
Your facts are correct and there is very little you can do to fix it. The worse thing is that you cannot deposit money into the loan to specifically pay off the private portion. You can refinance and split the loan and make the private portion P&I and leave the deductable portion as interest only. It is even a masive job to work out the portions.
. 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.
A loan setup incorrectly will lose all deductibility within 5 years on average.jasonamurphy,
Re reading your question I realised that I got so carried away with the overlap issues I completely forgot about the fact that you would no longer have a house on property A when you sell it. This does create a major problem. I note with concern that ID2003/322, ID2003/214 and ID2003/466 suggest that you will not be entitled to any main residence exemption at all on property A. This comes from SECTION 118-165 Separate CGT event for adjacent land or other structures
118-165 The exemption does not apply to a *CGT event that happens in relation to land, or a garage, storeroom or other structure, to which the exemption can extend under section 118-120 (about adjacent land) if that event does not also happen in relation to the dwelling or your ownership interest in it.
On this basis it looks like you may have to set up a caravan on the land and sell that with the land. Very messy! I recommend an ATO ruling application.
[email protected]
http://www.bantacs.com.auIf you can’t BAN TACS at least minimise it legally
Misty1,
The ATO Rental Properties 2003-04 publication states on page 3 that Rental Income includes:
“Associated payments may be in the form of goods and services. You will need to work out the monetary value of these.”
