Tax Q&A: Your tax questions on Declaring costs on an IP turned PPOR, answered


Declaring costs on an IP turned PPOR

Q: I purchased a property in WA in February 2015 as an investment property. Shortly after the purchase, I moved into the property and I did not declare any costs in my 2014/15 tax return.

I am now in the process of moving the mortgage from an investment mortgage to homeowner to lower the interest rate. I have been advised that I can still move out of the property and keep it as a home-owned mortgage provided I don’t purchase and declare another property as my primary residence.

I recently received a land tax notice assessment for $426 (annual fee), which I believe is only relevant for invested land, not the primary place of residence. I would like to contact the department and declare this land as my primary place of residence, to waive this and all future fees.

My plan was to keep the property as an investment and potentially move back to the UK sometime this year. Once we had moved out we would claim investment property tax benefits. Does this declaration affect my opportunity to claim investment property costs after we have moved out of the property?

I have incurred a number of costs in purchasing and maintaining this property which I plan to declare when possible. Thank you for your advice.

A: You are correct to not declare or claim any costs in your 2014/15 tax return. That’s because when you initially treated the property as an investment property it was not available for rent, nor was it generating income, therefore you cannot claim any outgoings/costs as tax deductions on this basis. Of course, as this property was then your principal place of residence, you cannot claim these costs as income tax deductions either.

The capital gains tax (CGT) main residence exemption (that is, the six-year rule) only permits the CGT main residence exemption for a period of up to six continuous years mainly on two conditions: firstly, that you don’t nominate any other dwelling as your main residence during the period of absence of up to six years, and secondly, that the dwelling in question must have been your principal place of residence from when it was initially purchased. As this was not the case in your situation, you will not be eligible to use the six-year rule for this dwelling.

Your land tax notice of assessment for $426 suggests that when this property was initially an investment property (up until the time when you moved into the property afterwards) you must have had another property as your main residence; or if you didn’t, then this property may have being owned by a company or a trust, in which case land tax would apply. If you believe that neither of these factors applies to you (that is, if you believe the land tax assessment was incorrect), you can make an application to the WA revenue office for this to be reassessed and reviewed.

When you move to the UK, you can still own this property and use it for income-producing purposes. In this case you could still claim the relevant outgoings as income tax deductions and also be assessed on the rental income produced in your Australian income tax return every year. However, as you most likely will be a non-resident for tax purposes in Australia, you will not be able to offset any of the income tax losses in Australia against your UK income, and also, non-residents do not have a tax-free threshold on Australian-sourced taxable income. 

Alternatively, if you do not use this property for income-producing purposes (for example, you may decide to keep the property but leave it vacant, or have it occupied rent-free), then you will not be eligible to claim the outgoings and expenses of the property as income tax deductions. If this was the case, I would encourage you to still keep all of your receipts and records, because these expenses can be capitalised and included in the capital cost base of the property, which may help reduce the CGT if you ever sell the property in the future.

While you are still living/occupying the property yourselves you are not entitled to claim any of the costs and outgoings for this property.

– Angelo Panagopoulos 

Expat Owner

Q: I am currently working and living overseas. I am a UK citizen and own a property in Australia. I do not pay tax in Australia but have owned my property for 10 years and lived in it as my principal home address. Is anybody allowed to live in my property while I am not there?

A: You are most definitely allowed to have people residing in your Australian property while you are living overseas. 

The question, however, is: should you charge the tenants rent or allow them to live in the property rent-free? This question is very important because, from an income tax and capital gains tax (CGT) point of view, whether you are using your Australian property for income-producing purposes or not results in different tax treatments.

From the limited information you have provided, I am going to assume your Australian property has always been your principal place of residence, has been vacant since you moved to the UK, and that you have not or do not have another principal place of residence in the UK (that is, you haven't 
or do not own a property in the UK as your main residence; instead, you are renting in the UK).
Based on those assumptions, if you start using the property for income-producing purposes, then you can do so for a period of up to six continuous years and preserve your CGT main residence exemption if you sell the property in the future. 

If this period exceeds six years, then the CGT liability will be prorated after the six-year period and beyond. You will also be required to lodge an Australian income tax return every year because the rent, with the associated allowable tax deductions, will be Australian-sourced income. 

If there is a net profit you will be taxed in Australia according to the non-resident income tax rates, which do not have a tax-free threshold. If there is a net loss, there will be no income tax payable and the tax loss will be carried forward on a rolling basis each year in your Australian tax return. 
You cannot offset the net rental loss in Australia against your overseas income.

If the property is not used for income-producing purposes (that is, you do not charge the occupants any rent), then the CGT main residence exemption will extend beyond six successive years, as in fact this period is indefinite, provided you do not nominate any other dwelling as your principal place of residence during this period. 

You will also not be required to lodge an Australian income tax return as you will not be earning assessable income or claiming tax deductions on the outgoings of the property.

– Angelo Panagopoulos

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