Tax Q&A: Your tax questions on CGT and claiming deductions answered



Our tax experts take a look at capital gains and the right way to claim deductions. If you have a tax question for our experts, email it to:

Q: My wife and I currently own two units: one in Sydney which is rented out about one year later after purchase, and the other in Brisbane which we live in at the moment. I believe the six-year CGT exemption rule applies to our main residence (the Sydney unit). But I read an article saying that if we rent both units out and live in a rental property (say in Perth), after just three years (rather than six years) CGT will come into effect on our main residence because the cumulative rental period is six years. Is it true?

A: For the six-year CGT exemption to apply, you must havelived in the property from day one after purchase, and ifyou subsequently move out of this property, you must not nominate another property/dwelling as your principal place of residence (PPOR) during this period. Based on the limited information you have provided in your question, it seems as though your PPOR (from day one) was the Sydney unit for one year, and you moved out after one year and are currently using this property as an investment property for income-producing purposes.

Based on your limited information, you are currently living in your Brisbane unit and the assumption is that this is now your PPOR. I require further information to provide you with the correct advice; for example, was the Brisbane unit used for income-producing purposes from day one before you moved in, or was the Brisbane unit your PPOR from day one after purchase?

Either way, as you own both the Sydney and Brisbane units, you cannot nominate both these properties as PPORs because you are only entitled to nominate one property at any given time. In any event, you are not entitled to the six-year CGT exemption because you are living in another dwelling that you currently own as well, and vice versa. I would require additional and more specific information to advise you properly; however, this is how it generally works.

Subsequently, if you rent both units out as investment properties for income-producing purposes and then rent in Perth yourselves, your Sydney property will be subject to a pro rata CGT liability because, at the moment and based on your limited information, it is currently not within the requirements of the six-year CGT exemption.

– Angelo Panagopoulos

Q: I bought my fi rst home for $400,000 with a basic no-frills loan set-up and have been diligently paying off my interest and principal for the past six years. Over the last four years, I've rented the property out and have been claiming tax deductions on it.

I have now refinanced the loan to $500,000 (bad investment, I know) with a 100% off set account to unlock the equity to finance my next investment property purchase.

I intend to keep the LVR at 80% and continue to claim tax deductions on the new loan amount.

Have I unknowingly created a problem for myself with the ATO for dodgy use of equity? Is it advisable that I use the equity for a principal place of residence only? Many thanks in advance for your advice.

A: As it is matched against rental income, the basic rulefor interest to be deductible is that the principal loanfunds borrowed have to be applied to an incomeproducing asset such as a rental property.

The security given to the lender that provides the loan is not as relevant.

Lenders often promote minimising the interest expense by reducing the principal, whether through the regular repayment plan or a faster mode. This is fine while the property is being occupied as the main residence.

Issues arise when the use of the property changes from private to investment when it is rented out. The preferable position would be for the initial loan to have features including interest-only plus an offset deposit facility. This would leave the original principal loan as is, but the interest expense would fall as more of the capital/repayment is deposited into the offset deposit facility.

As the usage of the property changes from main residence to rental investment, the interest expense should be deductible against the rental income. Where funds in the deposit facility are withdrawn, the entire interest expense should be deductible.

Often the principal of the loan is reduced through regular interest and principal repayments; interest expenses on additional redraw will only be deductible where the funds are used to acquire income-producing assets, including rental properties, but not the existing property.

Where an existing loan is refi nanced to access more funds as the property has grown in value, the deductibility of interest will depend on how the loan funds are applied. It is deductible where funds are applied towards income-producing purposes.

Apportionment is necessary where the loan is used to fund both a rental investment and a private asset. Record-keeping is essential in these situations.

– Shukri Barbara

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.

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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