Tax Q&A: Claiming Bank Charges, Turning Home Into Rental Property & Inherited Property

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13/01/2014


​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

CLAIMING BANK CHARGES

Question: I used to bank with one of the four big banks. When I requested to utilise the equity of my primary residence as a deposit to purchase an investment loan, I was only offered a very small equity loan.

At that time I was in a fixed interest loan, so rather than be shut out of the investment property market I chose to break the fixed interest loan, which incurred a break fee and exit costs totalling $3,900. I subsequently refinanced with another bank and was able to purchase my first investment property. Am I able to claim a tax deduction for the mortgage discharge expenses in this instance due to the break in loan being for the purchase of an investment property?

My other query relates to what I can claim in borrowing expenses. I incurred a range of fees in the purchase and settlement of my investment property. Am I able to claim for valuation expenses on the investment property, annual fee charged by the bank on the loan, settlement fees, registration fees for title and land, bank cheque fees, solicitor disbursement(non-conveyancing)?

Answer: Assuming that the fixed interest loan you are breaking relates to the purchase of an investment property, the mortgage discharge costs of $3,900 may be deductible. Section 25–30 of the Income Tax Assessment Act 1997 allows for a deduction, provided the mortgage was used by the taxpayer for the purpose of producing assessable income. This expense is fully deductible in the year it is incurred. However, in this case, the loan that was broken was private in nature and therefore the break fee is unlikely to be deductible.

As for the borrowing expenses, you are able to claim a range of expenses, such as stamp duty charged on the mortgage, loan establishment fees, title search fees charged by the lender, costs for preparing and filing mortgage documents, mortgage broker fees, fees for a valuation, and lender mortgage insurance. If the total of these expenses exceeds $100, you will need to apportion these costs over the duration of the loan or over five years if the period of the loan exceeds five years.

Costs such as registration fees for title and land, settlement fees and conveyancing fees form part of the cost base and will affect the potential capital gains implications of the property in the future.

– Dom Cosentino

 

TURNING HOME INTO RENTAL PROPERTY

Question: I am about to start building my property portfolio and I wonder how long we need to live in our principal place of residence (PPOR) before renting it out so that it stays as a PPOR for tax purposes?

Answer: A property established as a main residence on purchase will be exempt from capital gains tax (CGT) when sold at a profit.

To be exempt from CGT a property has to be established as a main residence. This usually includes occupying the property for at least three months after acquisition, having utilities registered in the owner’s name, including electricity, and telephone. Registering with the electoral commission with that address is also a stronger indicator of main residence. A main residence can be rented out. Any capital gain derived from selling the property (nominated as a main residence) within six years of it being rented out will be exempt from CGT. The six-year rule was designed to cover temporary situations in which people may need to move out, such as transfers interstate or overseas for work reasons or sickness, etc.

Where it is clear from the facts that the intention is to get a tax advantage, ATO, on audit, may still assess the gain as taxable.

Where a property is first established as a rental investment and then changed to be occupied as a main residence, a capital gain on the sale will be taxed. The taxable component will be calculated on a time basis, apportioned between the period occupied as a rental investment and the period occupied as a main residence.

– Shukri Barbara

 

INHERITED PROPERTY

Question: We inherited a one-eighth share of our family home after my father’s death seven years ago. The new wife of our father got 60% and has lived there free of charge ever since. We (myself and other siblings) pay our proportion of rates and other outgoings for the property (as does his wife).

My questions: Can this property be treated as an ‘investment property’ for taxation purposes? And if so, are we able to claim these expenses as a loss?

 

Answer: A property will ordinarily be treated as an investment property for taxation purposes if you enter into a commercial lease agreement and receive a commercial rate of rent from a bona fide tenant.

Under Australian tax law, to qualify for a tax deduction there must be a relevant connection between the expenditure you incur (such as rates and land taxes) and the derivation of your rental income. If no rent is derived (as would appear to be the case here), the arrangement will ordinarily be treated as private or domestic in nature, and any expenditure you incur will be disallowed.

Incidentally, if you plan to lease a rental property to a relative (for instance, siblings), you will need to charge a commercial rate of rent. If you don’t do this, there’s a risk that the Tax Office could reduce or disallow any rental expenditure you incur. For more details, check out Tax Office ruling “IT 2167 – Income Tax: rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases”.

– Jimmy Prince

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