Forum Replies Created
jasonamurphy,
What a challange. I’ve had to break this into bite size chunks. As I work through them it seems to me you gain much more benefit from leaving the PPOR gap on your first home. But in case I am missing a possible scenario I have included all my references so the discussions can open right up on what you should do.
You will need to crunch the numbers but I think your CGT bill will be minimal if you say Property B is exempt as your PPOR for the whole period of ownership by using the 4 year rule under section 118-150. But you can have no other main residence during that time other than the 6 months overlap under section 118-140 which you are entitled to even if the actual overlap is 7 months it is just a case of one of the properties being exposed for 1 month. The 6 months overlap period is the 6 months immediately before the sale of property A. For example lets assume you sell property A in Oct 04. It will be exempt as your main residence from Nov 01 to Feb 04 and again from May 04 to Oct 04. That is two months in a 35 month period. Only 5.7% of the gain is subject to tax and thats before the 50% discount. Then there is attacking the gain. Section 110-25 allows you to increase the cost base by interest, rates, insurance, repairs & maintenance incurred during the whole period of ownership. Once you have finished with this you will probably be saying what gain? In the meantime no CGT on property B as it has been your PPOR right from the start and you can sell in less than 12 months but you must live there for 3 months.If you can’t BAN TACS at least minimise it legally
References for debate:
Section 118-140 The 6 months overlap rule starts backwards from the date of sale for 6 months regardless of period of actual overlap. But
to qualify:
1) The first home must have been your residence for a continuous period of at least 3 months in the 12 months immediately preceding the date of sale.
2) If you were not living in the first home at any time during the 12 months preceding the date of sale it can not have been used for producing income (i.e. rented out or used as a place of business).
Note section 118-140 is not optional it must apply so if you have made a capital loss during the period of overlap you cannot claim it.Section 118-150 A vacant piece of land can be covered by your main residence exemption for up to 4 years before you finishing building a dwelling on it, if:
1) You move into the dwelling as soon as practical after it is completed.
2) You continue to use that dwelling as your main residence for at least 3 months before it is sold.
3) During this time you are not using your main residence exemption on another property though note you are still entitled to the overlap of 6 months under Section 118-140 above.Section 108-55 The relocated home becomes part of the land. Therefore its acquisition date is the date you purchased the land.
ID 2002/514 if the demolition expenses were incurred to enhance the value of the land, and are reflected in the state of the land when it is sold, they are included in the cost base, even when incurred to facilitate the construction of another dwelling.
TD 1999/79 the demolition of the house is a CGT event. But it does not create a capital loss unless money is received for it (ie insurance).
ID 2002/633 says that this is because the building has a zero cost base. Subsection 112-30(5) the original cost base is attributed to the remaining part (ie the land).
[email protected]
http://www.bantacs.com.auIf you can’t BAN TACS at least minimise it legally
Misty1,
If the proeprty is under 5 acres then it you live there you can exempt from CGT if you sell the whole property to the same person. If you are not going to do this makes no difference for tax purposes just apportion cost base amongst the sub division.chrisrenee,
On http://www.bantacs.com.au there is a checklist for rental property owners that may help jog your memory.Kp,
Settlement is when the title to the property passes to the wrappee. I have no professional expertise regarding stamp duty and it varies between states so I will leave that one for someone else to answer.KP,
The principle portion of the amount received is part of the deposit so not accessable as such though the sale itself is accessable.
The only time payments from the wrappee are rent is if they happened to be a normal tennant before you entered into the wrap agreement. Or you rented it to another tenant first. If either of these has happened you have a window of opportunity to get away from trading stock and into CGT though this is only an advantage if you hold the property for more than 12 months before you enter into the agreement to sell. The only difference between trading stock and capital gain being the 50% CGT discount available for properties held for more than 12 months. But if you do qualify for CGT you must pay the tax when you agree to sell rather than settlement which could be 25 years later.ChupaChup,
It is a question of fact. In other words the onus of proof is on you. If the property is managed and the first inspection does not suggest painting you are home and hosed. Else look for other evidence such as water or tenannt damage since purchase if the painting is done soon after purchase. If it is a mulitple dwelling in Qld the council normally inspects before settlement and lists repairs they require, if painting is not listed that is evidence. What the painter writes on the invoice may also be helpful.Skippygirl,
“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”You only declare the interest you receive as income and deduct against this income the interest you pay the bank. The principle portion of the repayment sits in your balance sheet as a deposit and is not assessable.
You are not thick I have just been doing this for too long to notice the obvious questions.
As the house is trading stock CGT does not apply. Normal income tax applies at the time of settlement.
The wrappee is considered to have taken up ownership for CGT purposes at the time the wrap is entered into. CGT event B1 happens when someone has the right to the use and enjoyment of an asset and there is an agreement that the title will eventually pass to that person, Section 104-15.gecco,
If the property is positively geared you will be taxed in NZ then have to include the net result in your Aust tax return as foreign income with a tax credit for tax already paid in NZ. If the tax already paid in NZ exceeds the tax in Aust you cannot us it to offset tax on Aust income but you can carry it forward for 5 years to offset against other foreign income of the same class.
If the property is negatively geared you can claim a deduction in your Aust tax return for the interest paid on the money borrowed to buy the property or claim the net loss on the house whichever is the lesser amount.If you don’t rent it out the cost base will be your original purchase price plus buying costs, selling costs, rates, interest, insurance, repairs & maintenance during the whole period of ownership.
Do you mean if we DO rent it out? We would be able to reduce the ‘taxable capital gain’ by all these expenses.
No I didn’t mean that. Firstly increasing the cost base and reducing the capital gain are the same thing as long as the market value rule does not apply. The market value rule only applies if the house is used to produce income. If no income is produced by the house but you exceed the 6 months overlap rule and give your main residence exemption to your new home, then some CGT will apply to your old home but there are lots of items that make up the cost base such as buying and selling costs, original costs, improvements and most of the costs of occupancy as you have not claimed them as a tax deduction.
Scott,
As wrapped properties are trading stock you cannot claim building depreciation. Other expenses such as rates and insurance are deductible to you but as the wrappee would normally reimburse you for these expenses the reimbursement is income to you so the net effect is nil in your tax return. The wrappee is not entitled to any tax deductions as the expenses are incurred in relation to their home.Roofarmer,
Both lots of advice are wrong. CGT does not apply to Wraps it is normal income tax from sale of trading stock but you are not taxed on the income until settlement.Here are the examples for Skippygirl and rulings for the doubters.
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.
Myydral,
The expenses are claimed in the year they are incurred.Misty1
You need to have a nexus between the income earned and the expense incurred. For example the door I trust was purchased as a repair. Its just not a repair until you carry that out. As for the furniture put it in the property anyway even if it is in the garage.
Julia
Fnomna,
I assume that you purchased your first house and moved straight into it. If so section 118-192 resets your cost base at the market value when you first rent it out unless you elect to leave your main residence exemption with your first home until you sell it. In the latter case the 6 years is relevant. Though I wouldn’t recommend the latter as this will expose your new home to CGT. Note you can add to the market value the costs of selling and any improvements you make while renting it out.
If you don’t rent before you sell and you sell within less than 9 months section 118-140 applies to allow you to exempt both homes as your main residence for a period of up to 6 months before the date of sale.
If you don’t rent it out the cost base will be your original purchase price plus buying costs, selling costs, rates, interest, insurance, repairs & maintenance during the whole period of ownership.
There is a free CGT booklet on our web site http://www.bantacs.com.au that covers all these issues in more detail.julia
Misty1,
For more free information try http://www.bantacs.com.au and download their rental property booklet, the CGT booklet would also be useful.
Julia
Mel,
Yes QS reports normally cover the plant and equipment but as you can estimate the cost of these it is not normally worth the cost of a QS report for pre 17th July 1985 properties as no building deprn claim availble. In this part of my answer I am refering to the older property, though I admit now when I look back I didn’t make this clear.
The ATO actually employs its own valuers. In fact one of my clients has just been recruited so I look forward to finding more out about this process next time I do his tax return.brahms,
I assume you are referring to qualifying for the 50% CGT discount and the 12 month wait.
A fixture to land becomes part of the land so at common law the acquisition date for the house would be the date the land was acquired. Section 108-55 of the CGT legislation has some exclusions to the common law principle but they would not apply in your case. They only apply to pre CGT land or depreciable assets under section 40 (not section 43 which is regarding special building write off) and assets for research and development.
In short this means only assets that are separate from the land would have the later acquisition date and these would only be your plant and equipment such as carpets curtains hot water system etc not the actual building.bennido,
Travelling costs to purchase a property are a capital expense so not deductible against the rent. Even though they are capital costs they are not included in the cost base on sale either, because they do not fit within the definition of the 5 elements that make up the cost base as per the legislation. This opinion is covered by the ATO in ID 2003/771.jkemsley
The 12 months doesn’t start again for your portion of the block but the potion of the block that you bought off your partner is first owned by you at the date of transfer so if you sell within 12 months there will be no CGT discount on that portion.
Residential buildings constructed after 17 July 1985 can be depreciated at 2.5% per year (4% if constructed between 18 July 1985 and 16 September 1987) when they are income producing (Div.10D: Sec. 124ZF-124ZLA now Section 43 & TD93/62). If the building was purchased after May 13 1997 this amount reduces your cost base for capital gains tax purposes, regardless of whether you actually claimed it or not, so in effect you are getting a tax deduction now in return for a higher tax bill when you sell.
A good reference regarding the building costs is ATO ruling TR 97/25 available from the ATO web site. There are a couple of little catches to relying on a quantity surveyor’s report. The first one being that you can only rely on a quantity surveyors report if you have exhausted all other means of finding out the original building costs. The legislation even compels the seller of a property to provide you with this information – Subsection 262A(4AJA) of the 1936 Act. The second catch is if the original owner was a spec or owner building the calculation cannot include their labour or profit.
So there is still some depreciation to run on the 13 year old building but you will probably need to get a Quantity Surveryors report. As for the carpets and curtains etc you can estimate their value at the time you purchased the property and work your depreciation from there.
