Your Burning Tax Questions Answered

Welcome to Property Market Insider’s tax Q&A section, a place where you can ask any tax-related question about your home or investment property. Our panel of tax experts will be delighted to respond to your queries. This week, one of our resident experts, Angelo Panagopoulos tackles your question about negative gearing and capital gains tax. He also answers your query about CGT exemption on your main residence. Got any burning tax question? Please email it to me at nila@propertymarketinsider.com.au or go to our Facebook page and post it there.

Question #1: CGT exemption on principal place of residence

We've only ever had one main residence which we purchased in May 1986. We moved out in February 1989 and never bought another main residence. We've only rented, however, we never moved back in every 6 years. I've heard that you can get a tax ruling that may allow us not to pay CGT as it has always been our main residence. Can you tell me if this is correct?
Answer
The Capital Gains Tax (CGT) exemption for the “6-year rule” only applies, among other things, if you have used your original principal place of residence (in your case, post-February 1989) for income-producing purposes (that is, you have tenanted the property and received rental income). If your original principal place of residence after February 1989 has been vacant or you have never received rental income, and as long as you have never nominated any other property as your principal place of residence then your CGT free exemption can literally be If your original principal place of residence after February 1989 has been vacant or you have never received rental income, and as long as you have never nominated any other property as your principal place of residence then your CGT free exemption can literally be indefinitely. It all It all depends. If you have used the property for income producing purposes beyond six years and have never moved back in then the first six years will be CGT exempt, however, beyond the six-year mark, the property then becomes subject to CGT if you ever sell the property in the future.

Question #2:  CGT calculation and negative gearing

I bought an investment property in 2010 for $219,000, paid stamp duty ( $6,175), conveyancing fee ($851), Certificate of title ($291). So the cost base was $226,317.
Now I plan to sell it for $365,000 with the following estimated costs:
  • Agent fee: $7,300
  • Conveyancing fee: $1,000
I've calculated that the net capital gain is:
($365,000-$7,300-$1,000-$22,6317)*50% discount=$65,192.
 
Is this correct? I'm self-employed and making about $30,000/year. I planned to put all my income in the superannuation, so I will have zero taxable income.
 
I also have other negatively geared property which is costing me $13,000 a year.
 
Can the above net capital gain offset my other negative gearing? If so, am I correct to assume my taxable income will become $65,192-13000=$52,192
 
Answer:
On face value you are correct to assume that your taxable income will be $52,192, however, in relation to claiming your superannuation contributions as income tax deductions, the following conditions must be met: -          You have given a valid notice to the trustee of the superannuation fund stating your intention to claim a tax deduction for all or part of the contributions you have made to the superannuation fund in that financial year; -          An acknowledgment of the notice has been provided back to you from the trustee of the superannuation fund; -          The notice of the form must be in an approved format approved by the Australian Taxation Office (ATO); -          You must ensure that the trustee of the superannuation fund receives the notice before the end of the day you lodge your income tax return for the year that the superannuation contributions were made or the end of the financial year (30 June) after the financial year that the superannuation contributions were made. For example, if the superannuation contributions were made for the 2015/2016 financial year then the notice is due by 30 June 2017; -          All the superannuation contributions must have been paid and deposited into the superannuation fund before 30 June of the relevant financial year. You cannot accrue superannuation contributions so any unpaid superannuation contributions cannot be claimed as income tax deductions. For example, if your financial accounts show that you have claimed $30,000 in superannuation contributions but you have actually physically paid $25,000 before 30 June, then you can only claim $25,000 in superannuation contributions as income tax deductions for that relevant financial year. If the notice is received after any of the above dates or events, then the claim for a superannuation contribution tax deduction is not valid and cannot be accepted or acknowledged by the trustee of the superannuation fund and therefore you will not be entitled to claim a tax deduction for the superannuation contributions in your individual/self-employed income tax return. Another point of consideration is that your superannuation contribution will have to pay income tax on the superannuation contribution it receives at the rate of 15% which therefore means that if it receives $30,000 as superannuation contributions for the year then the income tax liability that the superannuation fund will incur as a result of these contributions would be $4,500 Angelo Panagopoulos is Principal with Hamilton Reid. Email angelop@hamiltonreid.com.au
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Welcome to Property Market Insider’s tax Q&A section, a place where you can ask any tax-related question about your home or investment property. Our panel of tax experts will be delighted to respond to your queries.
This week, one of our resident experts, Shukri Barbara tackles your question about what’s considered a repair and what’s deemed an improvement in relation to claiming tax deductions on your rental property. He'll also answer your question about the six-year rule if you want to turn your home into rental. Got any burning tax question? Please email it to me at nila@propertymarketinsider.com.au or go to our Facebook page and post it there.

Property tax question #1: Repair or improvement?

Question:
Our tenant left our rental property in bad shape. There were scratches on the floor and broken windows. I'd like to get these fixed so I want to know if I could claim these as tax deduction? If not, why not?  If I replace a broken stove, can I claim it instead? 
Answer
The general rule is that where an expense is incurred to generate rental income then it can be claimed as a tax deduction against rental income. So a matching principle applies. Expenditure on repairs and maintenance of a rental property is generally allowed as a tax deduction against rental income. By contrast, a renovation/improvement or a new item is considered to be of a capital nature and can be depreciated. ATO refers to the depreciation of plant and equipment e.g. hot water system, as Capital Allowance. Depreciation of construction is referred to as Capital Write Off. These are the terms that need to put in the search engine to get a result. There is a lot of debate whether fixing an item up is a repair or a renovation. A rule of thumb I generally use to determine the difference is that that if it is fixed to the wall, floor or ceiling it forms part of the building and depreciates over a life of 40 years at 2.5% per year.
A repair or maintenance restores function to an item and restores it to working order. Such expenditure is allowed as a tax deduction against rental income.
Where repairs and maintenance expenses are incurred immediately after purchase/settlement, they are deemed to be capital in nature. Part of the cost base, they can be written off at the rate of 2.5% per annum. Some examples which distinguish between a repair and renovation include:  Replacing a window broken glass is a repair – restoring function. Replacing the whole window frame is capital as it is affixed to the wall. Fixing up a broken hot water system is a repair. Replacing the hot water system is capital subject to depreciation Fences, guttering and roofing are areas where tax agents and taxpayers always have discussions about whether work done is a deductible repair or depreciable capital renovation. Plugging a hole in a guttering or replacing a tile on a roof would be a repair. Where it would be capital/improvement is if the whole fence or guttering or roof were replaced. Replacing a broken stove is depreciable as a plant & equipment over its useful life. ATO has a table showing their view of useful life of various plant and equipment. Clear documentation from tradies would resolve a lot of disputes, particularly in the event of an ATO audit.

Property tax question #2: Six-year rule and CGT exemption

My husband and I moved out of our home to live closer to the city and rented out our home and became renters ourselves. Now we've decided to move into one of our investment properties and make it our home. What would be our tax liability regarding our home? How about the investment property that now became our home?
Response

When is a dwelling exempt from CGT

A property first established as a Main Residence immediately after acquisition will be exempt from capital gains tax (CGT) when sold at a profit.
While ATO mentions three months of occupation, six months is required for the Home Owner’s Grant. Our opinion is 12 months or more is preferable.

Establishing the property as a main residence

Establishing the property as a main residence requires the property to be occupied after settlement including moving the family and furniture in. Other indicators include enrolling on the electoral roll for that electorate. ATO also looks for connecting services such as telephone, power and gas. Having the mail directed to that address is another of the indicators of establishing the property as the MR. Where it is not possible to move in due to tenants continuing to lease the property, then on sale partial CGT may apply.

Extending the main residence exemption from CGT- 6 year absence rule

The main residence can continue to be exempt while nominated as the main residence for another 6 years while rented. So if sold within those 6 years it will be exempt from CGT. Where the property is ‘re-established’ as the MR before the expiry of the 6 years, then an additional 6 year extension may be possible If sold after the 6 years, those 6 years will be considered exempt portion. The condition is that no other property can be nominated as the main residence.

When is a dwelling subject to CGT?

Where a property is first established as a rental, it will be liable to CGT when sold at a profit/gain. Capital gain on land, holiday houses and other property not generating income is also subject to tax. CGT is payable regardless of how the proceeds of sale are used and regardless of what loan is outstanding at the time of sale Where a property first rented on acquisition and is subsequently occupied as a main residence, capital gains on sale will be apportioned between the period of occupied as a main residence and the period it generated rental income with CGT applicable to the rental period.

When should a decision be made as to when a property was a main residence?

Accessing the exemptions by nominating a property as a main residence only needs to be made when a property is being sold and a tax return is being prepared. Calculating various alternatives will provide you with best alternative of which property to nominate. It is generally most beneficial nominate MR to the property with the most CG accrued on it. Shukri Barbara CPA CTA, Chartered Tax Adviser, Property Tax Specialists www.propertytaxspecialists.com.au DISCLAIMER: Readers should not act on the information above without obtaining professional advice relevant to their circumstances. It is intended as information only.  

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