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FAQs - Property Tax

 

How is the sale of a subdivided backyard treated for tax?

The usual outcome where you subdivide the backyard of your main residence and sell the vacant block of land is that the sale of the land would be considered a "mere realisation" of the asset, and the gain is assessable under the CGT provisions. GST would also not apply to such a sale.

In contrast, if you arranged for the construction and sale of a building on the subdivided block of land, then it would be argued by the ATO that the transaction has a "profit-making" purpose, and it would be taxed as a normal taxable profit. This is likely to be the case, regardless of whether you have undertaken a property development before. GST is generally payable on 1/11th of the proceeds received. Of course, exceptions to this exist, including where the taxpayer is eligible for, and has applied, the margin scheme in respect to the sale.

Last Updated on Monday, 02 September 2013 21:46
 

If we rent our main residence in the future, how do we calculate its capital gains tax “cost base” when we eventually sell it?

Ordinarily, a main residence is exempt from CGT when sold, however not so where the property was previously used for income producing purposes, i.e. rented. In this instance, a partial main residence exemption is appropriate.

Where you move out of your main residence and rent it for the first time after 20 August 1996, the new cost base of the property is its market value at that time. However, the market value rule will only apply where:

  • The vendor would only obtain a partial main residence exemption when the dwelling is eventually sold, because it was used for income producing purposes; and
  • The vendor would have obtained a full main residence exemption if the dwelling was sold immediately before it was first rented.

Note – for CGT purposes, the vendor is deemed to have acquired the property at the time it was first rented, not when originally acquired.

Ordinarily, a main residence is exempt from CGT when sold, however not so where the property was previously used for income producing purposes, i.e. rented. In this instance, a partial main residence exemption is appropriate.

Where you move out of your main residence and rent it for the first time after 20 August 1996, the new cost base of the property is its market value at that time. However, the market value rule will only apply where:

·         The vendor would only obtain a partial main residence exemption when the dwelling is eventually sold, because it was used for income producing purposes; and

·         The vendor would have obtained a full main residence exemption if the dwelling was sold immediately before it was first rented.

Note – for CGT purposes, the vendor is deemed to have acquired the property at the time it was first rented, not when originally acquired.

Last Updated on Monday, 02 September 2013 21:46
 

What is the “margin scheme” basis of calculating GST on a property sale?

If the margin scheme is applied to the sale of property, the GST is generally calculated on the difference between the price at which the property is sold and its acquisition cost. GST is, therefore, only payable on the vendor's "margin" for the sale.

However, if the property was acquired before 1 July 2000, then the GST is usually based on the difference between the price at which it was sold and the market value of the property at 1 July 2000 (this is known as the "valuation" method).

Note – the margin scheme is not available to vendors who were able to claim an input tax credit on the property when it was originally acquired.

According to the ATO, a vendor intending to use the margin scheme must choose to do so at or before the sale of the property, which is usually settlement.

Last Updated on Monday, 02 September 2013 21:43
 

I’ve just bought a rental property, what deductions can I claim?

1. Rental Properties Checklist

The following is a list of the common types of expenses which landlords may generally claim as deductions, with additional clarifying comments where appropriate.

    • Advertising
    • Agent's commission
    • Bank charges
    • Borrowing expenses
      The deduction is spread over five years or the term of the loan, whichever is the shorter.
    • Building allowance
      When a rental property is purchased, a deduction (referred to as a "building write-off") may be available for capital expenditure incurred in constructing the property. Building write-off deductions are generally available at a rate of 2.5% p.a. (i.e. over 40 years) on the construction expenditure of the building. "Construction expenditure" is basically expenditure on the construction of the building itself, or the construction of any extension, alteration or improvement to the building.

      For residential property, this write-off is only available where construction of the building commenced on or after 18 July 1985. For commercial property, the deduction is available where construction of the building commenced on or after 20 July 1982. In relation to structural improvements, where construction commenced on or after 27 February 1992.

      Note – it is common for the original construction costs of the building not to be available to the purchaser, where this occurs the ATO allows the purchaser to obtain the estimate of an appropriately qualified person, such as a quantity surveyor.

    • Cleaning
    • Depreciation on furniture, whitegoods etc

      When a rental property is purchased, part of the overall purchase price relates to the acquisition of depreciating assets, such as curtains and blinds, carpets, and an oven.

      It is quite common for (especially with second hand properties) for no value to have been allocated to these assets in the purchase contract or any other legal documents associated with the purchase.

      In attributing a "cost" to depreciating assets in the above circumstances, the ATO advises that the taxpayer can either:

      a) obtain an independent valuation that establishes reasonable values for these assets - normally a quantity surveyor; or

      b) estimate their own reasonable value for these assets. In estimating these values, consideration should be given to the market value of the asset compared to the purchase price of the property.

    • Gardening
    • Insurance

      Although mortgage insurance is capital in nature and therefore not deductible, it is deductible as a borrowing expense (see above).

    • Interest

      Interest can be claimed even in the property's construction phase, as long as the intention was to always use the property for rental.

    • Land tax
    • Lease incentives
    • Lease preparation, registration, stamping
    • Legal expenses in recovering arrears of rental, evicting defaulting tenants, investigating creditworthiness and in preparing leases.
    • Postage
    • Power supplied (gas/electricity)
    • Rates
    • Registration of lease
    • Rent collection
    • Repairs

      Repairs on the property are 100% deductible if they are essentially the replacement or renewal of a worn out or dilapidated part of something, but not of the entirety (i.e. the whole).

      By contrast, if the expenditure is capital in nature and thus the repair is not deductible (i.e. it is an "improvement), it may qualify as a depreciable item or subject to the "building allowance" write-off (see above). Further it may also be included in the cost base of the property for Capital Gains Tax purposes.

      Initial repairs

      A deduction is not available for expenditure to remedy defects, damage or deterioration in existence at the date of acquisition (i.e. initial repairs).

    • Replacement of crockery, linen etc
    • Safe deposit box fees
    • Secretarial, bookkeeping fees
    • Servicing expenses
    • Stationery
    • Telephone
    • Travel

      Note – The costs incurred in inspecting properties with a view to purchase for letting were of a capital nature intended to gain an asset for an enduring nature.

    • Water rates

2. Holding costs deductions allowed when property "genuinely available to rent"

If a rental property is vacant for any reason, deductions for holding costs (e.g. interest, land tax and rates) and non-holding costs (e.g. repairs) are still deductible if the property is considered to be "genuinely available for rent." Such efforts may include:

  • Listing the property with one or more real estate agents;
  • Placing advertisements in newspapers; or
  • Letting of the property to friends or relatives (at commercial rates).

It is worth noting that a recent case held that merely placing an "available to rent" sign on a property was not sufficient to demonstrate "genuinely available for rent", thus rental and interest deductions were not available to the owner during the vacant period.

Last Updated on Thursday, 22 August 2013 05:55
 

Is the sale of a farm property GST-free?

The sale of a farming property will be GST-free if:

  • there has been a farming business carried on, on the land, for at least the five years preceding the sale, and
  • the purchaser intends that a farming business be carried on, on the land.

 

This concession is limited to the land, including fixtures and improvements. It does not apply to livestock, plant or equipment.

It is, however, not necessary that the seller of the land be the entity that was carrying on that business or that the recipient be the entity that will carry on that business.


 

 

 



Last Updated on Thursday, 22 August 2013 05:56
 

If I run a business from home, do I have to pay GST when I sell it?

Generally no, because the house will not be sold in the course or furtherance of an enterprise. If it was being sold as business premises, or as part house part business premises, then GST may be payable.

Last Updated on Thursday, 22 August 2013 04:24
 

 

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