SCENARIO:
You live with mum or in your fully paid off (or very close to it) home and they are your principal property of residence (PROP).
You build/buy brand new investment property at place B but you decide not to rent it out. So you do not rent it out, you do not live in it. It is empty. It is still investment property because you intend to make money by capital gain and yes you do not rent it. I know what you saying (why!). But lets say this is the scenario and intention. Make money by capital gain only not by rental income.QUESTION 1:
Do you still get the ususal benefits from TAXATION OFFICE like:
* 100% of bank interest is tax deductable
* Annual and regular costs are tax deductable
* Depreciation on construction 2.5% still applies
* Depreciation of higher % still applies on plant and equipment (furniture, movable electrical items etc.)Basicaly same except you do not have rental income ever. In some way it is same as if in theory you do intend to rent it out but for some reason your occupancy is zero.
QUESTION 2:
I assume that answer on above is yes as goverment and society still benefits from investor's decision to create and pay for investment asset.So what happens with all the tax benefits if you simply move into your investment house and you live your PROP empty. Does definition of PROP relate to formal choice of which property is your main (PROP) or it does relate to physical occupancy?
Remember: You do not rent out any of the 2.
QUESTION 3:
To make things even more interesting what happens if you do decide to rent your PROP and live in investment house but not for longer than 6 years ATO treshold? Obviously you simply pay tax on the rental income as you can not claim tax deduction on this rental income.Which of the above 3 questions are fully OK legaly and with ATO and which are not and why?
Hi there
I want to go back to the “why” question. Why would you not want to rent it out?
You mention that society still benefits. How’s that? It’s a vacant property – it’s not providing a roof over anyones head.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
1. No. Costs can only be deducted to the extent that the relate to generating an income.
Some costs could be claimed against capital gains when sold though.2. Only one could be counted as the main residence at any one period.
3. Yes would pay tax on the rent.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
1. No. Costs can only be deducted to the extent that the relate to generating an income.
Some costs could be claimed against capital gains when sold though.Teerw. Are you saying that when you see your accountant in June after full year of having investment property that rented out only for 6 months out of 12 and you pay 7% bank interest than only 50% of the bank interest cost would be aligible for the tax deduction? In other words the deduction % is directly proportional to property occupancy %?
And the same would apply on 2.5% construction cost tax depreciation? 50% if 6 months rented?
2. Only one could be counted as the main residence at any one period.
Well, if above and 1.) is the way as described than you realy can live physicaly anywhere you like while first property is your main residence all the time. If you live in your "investment" property 12 months a year than you would simply end up paying 100% costs without any immediate benefits until such time you either rent it out moving back or when you sell.If you had the property available for rent but couldn't find a tenant you may be able to claim the full deductions.
Not sure what you are getting at in your last paragraph.
If you are absent from your main residence you can rent it out and still claim it as your main residence and it could be CGT free for renting it for up to 6 years. If you are not renting it out or earning income from it it could be CGT indefinitely. But you can only count one house as your main residence at any one time (except for a 6 month cross over period when buying/selling).
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw,
The PROP is clear as mud and the 6 year period as well.
I do pick up on your word "may". Which means this is a grey area and someone is the decision maker? Look. Lets take a specific example. Many people buy investment property say in Withsundays. Say you spend $1mil AUD bying such a property there while you live in Brisbane.
With property like this there is a probability that:
a.) You will not get tenant 12 months but say 6 months or 2 weeks or ???
b.) You do want to go there and spend say 6 months per year or say 2 weeks a year holidays there.Who decides if your "may" applies and you get 100% of bank interest deduction and 2.5% at full rate. Accountant?
I say may because not all main residences are exempt from CGT.
The law decides whether you can claim interest or not. Section 8-1 ITAA 1997.
CGT exemptions for absence from main residence s 118-145 ITAA 1997Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks for the reference,
I will read it.
I know many people from Sydney do buy houses in Withsundays for instance. And many real estates do advertise investment properties where they say you are eligible for x amount of weeks as holiday portion. I also know Sydney people who have house there and spend 6months there and 6 months in Sydney. Or similar.
Until now I did not have this dilema because all properties are for full rent and are rented…and my PROP is my PROP since day one – clear cut.
Terryw,
It seems you have some quick references to law and I wonder what is applicable to foreign investors buying investment properties in Australia. My property broker is in Kuala Lumpur and Europe trying to sell $5mil property… Are we making it too easy to invest in our shores? Just curious in this case.
Thats not a legal question. Foreign investors still are restricted in what they can buy. I don't know if its too easy or not – its not something I have thought about before. There are certainly a hell of a lot of Chinese buying off the plan apartments at the moment. Not sure this is a good investment though so they will probably lose money – which would be good for the Australian economy!!??
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Possibly. Anyway thanks for your time in replying. Appreciated.
This property is typical example of someone in Sydney or so having this Bali property at Soverin Islands in QLD using it as tourist/holiday rental property charging $900 per night + $450 cleaning exit fee per stay.
I am sure this property is not occupied fully and could well be the case where rental income may well be say 6months max (On and Off) and the owner would pop in whenever they visit QLD. and property is not rented.
Somehow I feel the owner is getting 100% tax deductions on bank interest (if any) and 2.5% deduction on construction costs…
If the property is available for rent then all costs would generally be deductible
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Yes. That is how it works. Hence Whitsunday property looks more promising now…
Don't mean to offend you, but I don't really see the logic behind the following statement:
"You build/buy brand new investment property at place B but you decide not to rent it out"
Why would you decide not to rent it out?
Is it better to lose more money and claim more tax deductions even though you only claim a portion of that loss?
How does a property with lower income and higher vacancy help improve capital gains?
Usually cost = rent / yield, so in theory a lower rent would equate to lower price.
From an investment and cashflow perspective it doesn't seem to make any sense at all.
On the other hand, if your intentions are to live in the IP, and charge yourself no rent, so that you can claim more tax deductions, that would make perfect sense, although I am not sure if that is legal and whether the ATO would be OK with this. My guess is that you would need to charge market rent, but would probably be best for you to talk to an accountant about this.
My impression is that Cintaku wants to buy a holiday house but still claim all associated costs with it.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Kong,
In a main stream definition of investment understanding yes. Cost = rent/yield. However some (much smaller groups) would also say:
Cost = yield (high quality). Similar to as some groups would say also Cost = Rent (low quality) without any yield.It is similar to high end groups buying expensive art or wine and sticking it into basement where no one can seen it.
Some however decide (very occasionaly) to lend the art to galleries (for a fee – rent) so people can see it from time to time.In property similar could apply. Building and investing for capital gain only no rent.
There are many opinions on as where is the balance between property like that and tax implications because as Jamie pointed out biggest benefit to society of investment property is within rent portion not as much yield portion. The word investment has also 2 meanings. So when I said investment initialy what I meant was yield related investment.
Saying that I was interested to see where the legal clarity on that issue is and as Terryw pointed out the clarity is defined by law and indirectly by accountants we use that shall comply with the law and give investors legaly correct advise.
Goverment and society mostly benefits from rent half of property investments. That is why it offers 2.5% Tax benefits on depreciation and 5%or higher on independent plant depreciations as well. And if you invest using borrowed money than also deductions on bank interest.
And as it can be seen from above discussions the initial question might seem to be trivial at first but it is a complex issue because
the law seem to allow 100% deductions if property is available for rent (this however is case by case issue and needs to be as Terryw pointed out consulted well with axperts on that matter).Availability of a property to be rented (no matter at what price) seem to be the major requirement in order to recieve legaly 100% deductions. I think that setting rent so high that property would not rent out despite property being available for rent would definitely rise questions with ATO and rightfully because benefit to society (when it comes to rent) is minimal.
Setting rent too low on the other hand could lead to property damage, speedy deteriation (I am talking high end properties here not the main stream), 12 months occupancy. I think the high end market (similar to the Bali example house above renting at $900/w) investors set their rent at level where property is occupied long only as long as to ensure that property is in good shape and deteriates at slower or same rate as depreciation speed. That way they get 100% tax benefits and the property is rented out.
P.S. Above comments would rather apply on high end properties that seek yield rise as main objective while rent portion is secondary. Typicaly properties in Whitsundays, Mooloolaba, holiday leetings etc… That is the way I see it at the moment.
P.S. As far as benefits to society of property that is not rented. Well if it is not available for rent the tax benefits are not there. If it is available rent (ignoring for how long for a moment) than the benefits could apply. But there are benefits to siciety even if building is not rented. Once again it is a high end property not main stream property. The benefits are around potential future of the building to be bought and sold, around the fact that property market has got addition of high quality property (it is going to be sitting there for at least 100 years), it does help economy by investor deciding to spend money on it, and also it is pushig main stream property quality up instead of down etc……
Arguably because of recognition of these no-rent related social/economical benefits I think Government supports the full deduction to some degree and they do not fully relate this to rent income or duration of income only. Strictly speaking.
Correct me if I am wrong, but isn't the yield based on the use of the property i.e. for commercial it would depend whether it is retail (4.5-8%), industrial (7.5-8.5%), or office(6.5-8%), and since the property you are considering buying/building is already at the higher end, wouldn't it be harder to improve its use, thus its yield, and ultimately its price? Seems somewhat illogical to try to lower rent, and pay a higher price for the property just for the sake of having a lower yield, as this is less attractive to many investors and yields of similar properties will likely still remain the same.
Kong,
You are not wrong. If maximising your profits is the main objective than you are not wrong. What I am doing is not advisable for borrowed money investments and investments where maximising profits is the main objective. It is still an objective but not the main one and over period of time of say 20 years…
My appology by yield I meant capital gain – market value of property.very unique strategy cintaku. could work for you, but from where i am right now, i don't think i could do it for now
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