Tax depreciation and renting to family questions

Ben wrote:

Hi All,

I was just hoping to get a better understanding around a certain scenario i am considering.

Just quickly I am about to start a build at the rear of my property and once completed in about 9 months time I will be moving into the property for 1 year to avoid the capital gains hit.

Are you subdividing the land ? if yes then Firstly, CGT will be applicable as the newly subdivided area is no longer part of your main residence.
Secondly, GST will be applicable.

To recap on a previous article…

GST is applicable if you are running an enterprise and have an expected turnover of ‘taxable supplies’ in excess of $75,000 per year.Subdividing and building with the intention and expectation of a profit is considered an enterprise, plus any profits derived from a new residential build are a taxable supply.
see http://propertyupdate.com.au/tax-implications-of-subdividing-the-family-home/

Ben wrote:

Once a year passes I will be selling the property and then moving back into the front property which is going to be my main family residence for the foreseeable future.

During the 1 year I plan to live in the rear property though I will be renting out my front property which is an old 1950′s brick that I will be drastically renovating when I do move back in after the rear property is sold.

You can only claim cgt exemption on one property at a time.
So while you live in the back property you have to value the front property and then value it later when you move back into it.
This time period has a cgt event as far as if you sell the front property you have cgt to pay for the time period you rented out the front property fpr the increase in value of the front property.

Ben wrote:

So now you know my plan I have two questions. Firstly I am considering renting out the property to my mother who is in the process of selling her home and just wants to rent for a couple of years. If my mum was to rent the property then firstly I would know its in great hands so I could rest easy knowing my family home is being taken care of. Secondly though it will allow me to do work on the house whilst she is the tenant, unlike if I rented it out to an unknown tenant. So firstly is there any legal/tax issues with renting to family members? Or in the eyes of the ATO are they seen as a normal tenant?

you have to be careful http://law.ato.gov.au/atolaw/view.htm?DocID=ITR/IT2167/NAT/ATO/00001 section 14
you have to rent out the property at market rental rates.

Ben wrote:

My second question is around depreciation of assets. As the front property is my family home I want to make some updates and thought the best time would be when the property is being rented so i could get the tax benefits. I want to add ducted heating and a split system and also a new hot water service. All these are required for the home to be rented as all the existing units are basically useless. So my question is If i was to purchase and install all these whilst the property is being rented, how would that affect my tax? Remember I only plan to rent out the home for 1 year so could I write these off over a single year or would they need to be over say 10 as a depreciation? And if 10 then do i only get 1 year depreciation as after that point it is no longer a rental property?

The items are depreciated from whatever the tax office determines the effective life is of each item.
Now if you change the use of the property from income producing to private use the depreciation will continue but you won’t be able to claim it during the time the property is used for private use. So if you had ten years of depreciation life on an item you claim in year one but move in and can’t claim for year 2 and then move out and rent it out for year 3 then you most likely can claim year 3. It would be proportioned between rental income producing time and private use time.
see https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/ind00342353n17290613.pdf