Tax Q&A:Your tax questions answered




Question: 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.


Answer: Loan mortgage insurance is a tax deductible borrowing expense if used for income-producing purposes, for example an investment. These costs are deductible over the period of the loan or five years, whichever is shorter. This allows for any undeducted amounts to be deductible in that tax year if the loan is paid out or refinanced early. 


The deduction is calculated on a day’s basis, dependent on when the expenditure occurred, so in the first and last year only a proportional amount will be deductible. If the mortgage insurance is less than $100, then it is fully deductible in the first year.


The tax deductions are available, irrespective of whether you used cash savings or borrowed funds from any source. If borrowed, the interest on these funds will be tax deductible as well. Please note that, in the unlikely event that the mortgage insurance is paid but the loan does not proceed, then no deduction is available.


– Ken Raiss




Question: 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?


Answer: On first being acquired, a property can be established as either a main residence or a rental investment. The nature of first usage of the property will dictate how the CGT is calculated on sale at a profit. Whenever a property is occupied as an main residence, it will be exempt from CGT for that period of time. The legislation allows for only one main residence for each single person or family. 


When a property is first established as a main residence on acquisition and later rented out, it can be exempt from CGT if sold within the next six years from the date it was first rented – but only if no other property is nominated as a main residence. Examples of this are where people are located to other states or overseas.


If another property is nominated as the main residence, then any gain on the sale of the first property will be subject to CGT. Examples include where people move to a new property and rent out the old property, or couples who each have a main residence and decide to marry/live in a de facto relationship.


In its simplest form, CGT is basically calculated as the difference between the net selling price and the cost base. The cost base will be the market value of the property when it changed its character from a main residence to a rental property. So any growth while it was a main residence is not taxed.


By contrast, when a property is first established as a rental investment and then changes its character to a main residence, its cost base will include the original purchase price, stamp duty, legal fees, building inspection fees, 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




Question: 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]. My fiancé lived in a unit that 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?


Answer: This is an interesting situation. The answer lies in a section of the tax law relating to “treating a dwelling as your main residence after you move out”. To qualify for the CGT exemption, the property must have been the main residence from when you acquired it. In this case, this requirement appears to have been satisfied.


If you move out of the property and rent it, you can continue to claim an exemption from CGT for up to six years after you move out (assuming you have no other PPOR). As you have been leasing the property for eight years, a partial exemption is available.


The amount of the capital gain that is taxed depends on what proportion of your ownership period the home was neither your main residence nor covered by a six-year period of absence that you can claim as exempt. If you owned the home for more than 12 months, you may also be eligible to reduce your capital gain by the 50% CGT discount.


This is where the interesting situation occurs. In this particular case a market valuation of the property at the time it ceased to be your main residence is necessary. By applying the six-year exemption, the capital gain is apportioned and calculated as two-eighths of the difference between the sale price of the property (and associated costs) and the market value when the property ceased to be your main residence. Given that the property has been held for more than 12 months, the 50% discount can be utilised to further reduce the capital gain.


If there is a capital loss during this period, the loss can be applied against any other capital gains made during the year. Otherwise, this is carried forward to later income years. This is a complicated area of the tax law, and significant capital gains savings may be made. I would suggest that you consult your accountant to confirm the exact amounts involved.


– Dom Cosentino

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