Tax Q&A: Your tax questions answered

By
03/09/2015

CLAIMING DEDUCTIONS

Question: I’m about to sell my father’s house. I live in it with my daughters, and I'm on the disability pension. My dad purchased half the block in 1989, added a pool and landscaped the gardens. It’s rundown now, but I need to know about capital gains tax. He first purchased half the property in 1968, and I need to know how much inheritance tax will be upon sale.

Answer: Where a property is inherited following the death of a relative, there are no inheritance taxes in Australia. From the question, we understand that one half of the property on a separate title was purchased in 1968 and used as the main residence. On a separate title, the other half of the property was purchased in 1989 for adding a pool and landscaped gardens – also used as a main residence.

Generally, the two halves will be treated as one main residence where they are used as such.

Property acquired before CGT legislation came into effect on 19 September 1985 is exempt from CGT when it passes on to the deceased estate beneficiary.

Where the beneficiary occupies the property as their main residence, it will continue to be exempt.

If the beneficiary rents the property out immediately upon inheriting it, the cost base of the property will be deemed to be the market value on the date of decease. If the inherited property is occupied as a main residence for a while before it is rented out, the cost base will be the market value on first being rented out.

A beneficiary inheriting a property acquired after 19 September 1985 by the deceased will be deemed to have acquired it at the same date and with same purchase details as the deceased. If it was a main residence or sold as part of a main residence, then its cost base will be the market value on date of decease.

Where inherited property is sold within two years of date of decease, no capital gains are assessable. Selling after two years may create a CGT liability if it is sold for more than the cost base.

Note that a 50% discount is available when assets sold have been held for longer than 12 months.

– Shukri Barbara

MOVING OVERSEAS

Question: I’m thinking of moving overseas (to Russia) for two years and renting my home, which is here in Melbourne. The rental income that I will receive from my home is $700 per week. For the two years that I will be living in Russia, do I have to pay any tax on my rental income?

Answer: You can rent out your home for up to six years while you are overseas (providing that your home was your principal place of residence from day one when you acquired the property and the property is in your own individual name) and still preserve your capital gains tax tax-free concessions if you sell the property in the future – and providing that you do not own or nominate another main residence during this period.

The amount of tax that you may be required to pay on this income ($700 per week or $36,400 per annum) depends mainly on two factors.

Firstly, the level of debt that you currently have against this property, in addition to the annual outgoings you incur, will determine how much your interest expense is on the loan and what your net profit is. This will determine how much tax you will pay.

For instance, if the sum of the interest expense on the loan plus the annual outgoings of the property is greater than $36,400, then you will either break even or make a tax loss, which means that no tax is payable. If, however, the sum of the interest expense on the loan plus the annual outgoings is less than $36,400, then you will make a net profit, hence you will have to pay income tax on this profit.

Secondly, the tax rates that are applicable to your annual net profit will depend on whether you are an Australian resident for tax purposes or not, as generally, if you are deemed a non-resident of Australia for tax purposes, your income tax rates are higher than the rates for Australian residents for tax purposes.

For example, non-residents are taxed from the first dollar of net profit, because there is no tax-free threshold (for non-residents of Australia) which Australian residents are fortunate to have. The question of whether you are an Australian resident for tax purposes or not is a question of the relevant facts, and it’s always on a case-by-case basis.

– Angelo Panagopoulos

TURNING HOME INTO INVESTMENT PROPERTY

Question: I want to buy another property and move into the new property. So my existing property will become my investment property. I want my first home, which will become my investment home, to have more interest payments so that I can negatively gear it (or pay reduced tax), and I want to move my extra principal payments ($125,664) into my new home. Is it possible to just move my finances (since my current loan account allows for a redraw facility) from my current loan account to a new loan account (for my new home)? Are there any tax implications for this?

Current own home (first home):
Total loan amount (principal): $244,000
Principal repaid: $125,664 is currently in home loan account with redraw (not in offset account)
Principal remaining: -$117,365

Answer: When it comes to securing the loan for your next main residence, it does not matter how many or which properties you use for security. You can use the redraw facility on your current loan to purchase your new main residence, which therefore means this current loan will increase to the original amount of $244,000.

However, if you move out of your current home and use it for income-producing purposes for tax reasons, the tax deductible debt must be capped at $117,365 (the current principal remaining) and not $244,000. The reason for this is that the increased loan (that is, use of the redraw facility to increase the loan to its original amount of $244,000) is for private purposes as it will be used to fund your new main residence, and therefore this cannot be tax deductible. The tax deductible debt in this case must remain at $117,365.

However, and for the right reasons, there may be a couple of strategies that may increase your tax deductible debt, but I will need to review your overall specific structures and situation in more detail before I can further advise and assist you in this area.

– Angelo Panagopoulos

The tax experts


Shukri Barbara is a CPA, CTA and principal advisor at Property Tax Specialists, with over 30 years’ experience in public practice, specialising in property tax, ownership structures, asset protection, (legally) minimising tax, and cash flow analysis

Angelo Panagopoulos is principal at Hamilton Reid Chartered Accountants, specialising in property and taxation, asset protection and ownership structures.

Disclaimer
The views provided are of a general nature only and should be considered as general education. Readers should not act on the information above without obtaining professional advice relevant to their circumstances. The article is intended as information only.

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