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TAX | Q & A
Tax Q&A Your tax questions answered Our tax experts are on hand to answer any tax queries you may have regarding your property investments and wealth-creation strategies. Email your taxing questions to editor@yipmag.com.au TAX DEDUCTIBILITY OF MORTGAGE INSURANCE
Q
I am buying an investment property. I need to pay loan mortgage insurance. I can pay it up front by cash or add to my mortgage. I’m not sure which way to pay so that I can claim for a tax deductible expense. Please advise.
A
Loan mortgage insurance is a tax deductible borrowing expense if used for income-producing purposes, for example an investment. These costs DUH GHGXFWLEOH RYHU WKH SHULRG RI WKH ORDQ RU ÀYH \HDUV, ZKLFKHYHU LV VKRUWHU 7KLV DOORZV IRU DQ\ XQGHGXFWHG amounts WR EH GHGXFWLEOH LQ WKDW WD[ \HDU if the loan is paid RXW RU UHÀQDQFHG HDUO\ 7KH GHGXFWLRQ LV FDOFXODWHG RQ D GD\¡V EDVLV, dependent on when the expenditure occurred, VR LQ WKH ÀUVW DQG ODVW \HDU RQO\ D SURSRUWLRQDO DPRXQW will be deductible. If the mortgage insurance is less than $100, WKHQ LW LV IXOO\ GHGXFWLEOH LQ WKH ÀUVW \HDU The tax deductions are available, irrespective of whether \RX XVHG FDVK VDYLQJV RU ERUURZHG IXQGV IURP DQ\ VRXUFH If borrowed, the interest on these funds will be tax deductible as well. Please note that, LQ WKH XQOLNHO\ HYHQW that the mortgage insurance is paid but the loan does not proceed, then no deduction is available. – Ken Raiss
The experts Dom Cosentino Dom is a partner of Kennedy & Co Chartered Accountants, specialising in property and taxation. He lectures in a number of courses relating to property and taxation and presents free monthly property seminars at Kennedy & Co. Visit www.kennedy.com.au
Shukri Barbara Shukri Barbara is a CPA and CTA with over 30 years’ experience in public practice. As principal adviser at Property Tax Specialists, Shukri combines his experience, together with his property tax specialty, to support property investors on ownership structures, asset protection, (legally) minimising tax, and cash flow analysis. Contact shukri@propertytaxspecialists.com.au or visit www.propertytaxspecialists.com.au for more information
Ken Raiss Ken Raiss is a property investment expert and director at national accounting firm Chan & Naylor, Australia’s leading national property accounting group. The Chan & Naylor Group helps its clients by providing a one-stop shop for those who want to grow and protect their wealth from generation to generation. Visit www.chan-naylor.com.au
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AUGUST 2013
yourinvestmentpropertymag.com.au
CONFUSED ABOUT CGT
Q
We have an investment property that we are moving into to sell. It’s always been an investment. I understand CGT [capital gains tax] is calculated on a time basis, ie time rented in proportion to time lived in, which won’t be much in our case. What I don’t understand is why people recommend a valuation on a cost basis when it’s all time based anyway for CGT?
A
2Q ÀUVW EHLQJ DFTXLUHG D SURSHUW\ FDQ EH established as either a main residence or a rental iQYHVWPHQW 7KH QDWXUH RI ÀUVW XVDJH RI WKH SURSHUW\ ZLOO GLFWDWH KRZ WKH &*7 LV FDOFXODWHG RQ VDOH DW D SURÀW :KHQHYHU D SURSHUW\ LV RFFXSLHG DV Dn main residence, it will be exempt from CGT for that period of time. The legislation allows for RQO\ RQH main residence for each VLQJOH SHUVRQ RU IDPLO\ When D SURSHUW\ LV ÀUVW HVWDEOLVKHG DV D main residence RQ DFTXLVLWLRQ DQG ODWHU UHQWHG RXW LW FDQ EH H[HPSW IURP CGT if sold within the next six \HDUV IURP WKH GDWH LW ZDV ÀUVW UHQWHG – bXW RQO\ LI QR RWKHU SURSHUW\ LV QRPLQDWHG as a main residence. Examples of this are where people are located to other states or overseas.
The nature of first usage of the property will dictate how the CGT is calculated on sale at a profit ,I DQRWKHU SURSHUW\ LV QRPLQDWHG DV WKH main residence, WKHQ DQ\ JDLQ RQ the VDOH RI WKH ÀUVW SURSHUW\ ZLOO EH subject to CGT. Examples include where people move to D QHZ SURSHUW\ DQG UHQW RXW WKH ROG SURSHUW\, or couples who each have a main residence and GHFLGH WR PDUU\ live in a de facto relationship. In its simplest form, &*7 LV EDVLFDOO\ FDOFXODWHG DV WKH difference between the net selling price and the cost base. 7KH FRVW EDVH ZLOO EH WKH PDUNHW YDOXH RI WKH SURSHUW\ ZKHQ it changed its character from a main residence to a rental SURSHUW\ 6R DQ\ JURZWK ZKLOH LW ZDV D main residence is not taxed. %\ FRQWUDVW ZKHn D SURSHUW\ LV ÀUVW HVWDEOLVKHG DV a rental investment and then changes its character to a main residence, its cost base will include the original purchase SULFH VWDPS GXW\ OHJDO IHHV EXLOGLQJ LQVSHFWLRQ IHHV etc. The capital gain will be calculated as the difference between the net selling price and the original cost incurred. The taxable portion of the capital gain will then be apportioned on the basis of time occupied as a rental and time occupied as a main residence. – Shukri Barbara
TAX | Q & A
CGT ISSUE ON AN IP, ORIGINALLY A PPOR
Q
I have an enquiry relating to CGT [capital gains tax] after the sale of an investment property that was once a PPOR [principal place of residence] 0\ ÀDQFp OLYHG LQ D XQLW WKDW was his PPOR and then rented it out eight years ago. He has not purchased any other PPOR since and has been renting only. He has been slack with his tax returns and is in the process of sorting it now. We are also looking at selling the property to use the capital for future investment or to fund our next PPOR. If he claims tax deductions on the property since renting it out for the last eight years, will he be entitled to any CGT exemptions for any portion of that time or none of it?
A
This is an interesting situation. The answer lies in a section of the tax law relating to “treating a GZHOOLQJ DV \RXU PDLQ UHVLGHQFH DIWHU \RX PRYH RXWÂľ 7R TXDOLI\ IRU WKH CGT H[HPSWLRQ WKH SURSHUW\ PXVW KDYH EHHQ WKH PDLQ UHVLGHQFH IURP ZKHQ \RX DFTXLUHG LW In this case, WKLV UHTXLUHPHQW DSSHDUV WR KDYH EHHQ VDWLVĂ€HG ,I \RX PRYH RXW RI WKH SURSHUW\ DQG UHQW LW \RX FDQ continue to claim an exemption from CGT for up to six \HDUV DIWHU \RX PRYH RXW DVVXPLQJ \RX KDYH QR RWKHU PPOR $V \RX KDYH EHHQ OHDVLQJ WKH SURSHUW\ IRU eight \HDUV, a partial exemption is available. The amount of the capital gain that is taxed depends on ZKDW SURSRUWLRQ RI \RXU RZQHUVKLS SHULRG WKH KRPH ZDV QHLWKHU \RXU PDLQ UHVLGHQFH QRU FRYHUHG E\ D VL[-\HDU SHULRG of absence that \RX FDQ FODLP DV H[HPSW ,I \RX RZQHG WKH KRPH IRU PRUH WKDQ PRQWKV \RX PD\ DOVR EH HOLJLEOH WR UHGXFH \RXU FDSLWDO JDLQ E\ WKH &*7 GLVFRXQW This is where the interesting situation occurs. In this particular case a market valuation RI WKH SURSHUW\ at the time it FHDVHG WR EH \RXU PDLQ UHVLGHQFH LV QHFHVVDU\ %\ DSSO\LQJ WKH VL[-\HDU H[HPSWLRQ, the capital gain is apportioned and calculated as two-eighths of the difference EHWZHHQ WKH VDOH SULFH RI WKH SURSHUW\ DQG DVVRFLDWHG FRVWV DQG WKH PDUNHW YDOXH ZKHQ WKH SURSHUW\ FHDVHG WR EH \RXU PDLQ UHVLGHQFH *LYHQ WKDW WKH SURSHUW\ KDV EHHQ KHOG IRU PRUH WKDQ PRQWKV WKH GLVFRXQW FDQ EH XWLOLVHG WR further reduce the capital gain. If there is a capital loss during this period, the loss can be applied DJDLQVW DQ\ RWKHU capital gains PDGH GXULQJ WKH \HDU 2WKHUZLVH WKLV LV FDUULHG IRUZDUG WR ODWHU LQFRPH \HDUV 7KLV LV D FRPSOLFDWHG DUHD RI WKH WD[ ODZ DQG VLJQLĂ€FDQW FDSLWDO JDLQV VDYLQJV PD\ EH PDGH , ZRXOG VXJJHVW WKDW \RX FRQVXOW \RXU DFFRXQWDQW WR FRQĂ€UP WKH H[DFW DPRXQWV involved. – Dom Cosentino
If you have a tax question for our experts, email it to: editor@yipmag.com.au Disclaimer: The advice contained in this section is general in nature and its preparation has not taken any individual circumstances, objectives or financial needs into account. Readers are advised to seek appropriate advice from licensed professionals before embarking on any investments.
AUGUST 2013
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