Tax Q&A: Your tax questions on Refinancing Loan Security, answered

By
4/8/2016

Q: REFINANCING AND LOAN SECURITY

We are currently researching refinancing options for an investment property and owner-occupied property.

We have an interest-only investment loan (for full purchase price plus borrowing costs). We also have a variable, principal and interest home loan. The owner-occupied property has been used to crosscollateralise both loans.

We have been told that having the two properties ‘stand-alone’ is a better proposition in the long run and so a mortgage broker has suggested borrowing 80% LVR using our investment property as security, and then borrowing the shortfall with another investment loan that is secured against our owner-occupied property, as well as a separate variable owner-occupied loan with offset.

A: Ultimately, it does not matter which property is used as security for your loans – whether they are cross-collateralised, stand-alone or a mix of both. For example, you can use your owneroccupied home as security for an investment property loan and vice versa. The test is what the purpose of the loan is for, and if the loan is used to purchase an investment property for income-producing purposes then the interest on the loan is tax-deductible irrespective of what security is used for the loan.

Another example is that when you increase your investment loan for private purposes (such as a holiday or renovations to your owner-occupied home) then you are unable to claim that additional top up of that investment loan for income tax purposes. It is the purpose of the loan that determines the tax deductibility of the interest.

Also, if you are refinancing your loans with mixed purposes (that is, your loans may be part private and part investment) then you must keep proper records and only claim the portion of the interest that is only for investment purposes as income tax deductions.

Q: SHORT-TERM ACCOMODATION

My question is about Airbnb and the implications it can have on capital gains tax. I have been living in my PPOR for five years and rented out my apartment twice during the year 2014. The first period was for three weeks and the second period was for four weeks whilst I was away. My accountant states that I don’t have to pay capital gains tax under the six-year rule. Is this correct, as I have received conflicting information?

You may have been living in your current principal place of residence for five years but you must have been living in this dwelling from the beginning of when you purchased the property. Satisfying this criteria, then this usually comes down to intention and a case-by-case basis. Technically, you have an arguable position to state that you were living away from your main residence and did not nominate any other dwelling as your main residence and you moved back in to your main residence within six years on both occasions, so therefore, technically, you may have a case to satisfy the capital gains tax six-year exemption.

“It is the purpose of the loan that determines the tax deductibility of the interest”

The fact that you found your tenant from Airbnb or any other source does not matter as it all comes down to the above rules: intention and question of fact.

Q: LAND TAX AND TRUST STRUCTURE

I was given advice that if I set up a fixed unit trust with a unit holder being a company, then in NSW I can enjoy the land tax-free threshold, and also to set up a trustee company to provide further asset protection. But what are the pros and cons as compared to a structure with a discretionary trust, plus a trustee company, and keep paying land tax?

A: Structured correctly, a trust usually can provide for better asset protection. However, insofar as land tax is concerned (and land tax is a state-based levy and the rates and thresholds are different in each state of Australia), depending on which state you purchase the property and how you structure your property purchases within the appropriate trusts, you may have land tax-free exemptions if you satisfy the land tax-free thresholds in the appropriate states. A structure with a discretionary trust (irrespective of who the trustee is) usually has better land tax rates than fixed unit trusts, but again this all depends on which state the property is purchased in. You have mentioned that your property is based in NSW and usually you will find that it would be very rare to enjoy land tax-free thresholds in NSW irrespective of which type of trust you use. I would encourage you to contact the Office of State Revenue (OSR) in NSW who can assist and advise you with your specific case.

Q: STAMP DUTY ON INHERITANCE

My brother and I inherited the family home in November 2015 and I have recently made the decision to buy him out. The property is worth $330,000 and I have been advised that I will need to pay stamp duty on half the property. Could you please tell me if this is the case and how much the stamp duty will be?

A: Assuming that you jointly own the property 50/50 with your brother, the dutiable value of transfer for stamp duty purposes would therefore be $165,000. You haven’t mentioned which state the property is in so as a guide, the stamp duty in the following states would be approximately $4,265 (NSW), $4,620 (Victoria), $1,650 (Queensland), $5,430 (SA) and $3,705 (WA).

Q: INVESTMENT PROPERTY TAX IN RETIREMENT

If I am a retiree, do I get taxed for income generated for an investment property? Can I still claim negative gearing? If I put the property under my mother's name as co-owner (mother is a retiree and an overseas resident), do I still pay tax and apply for negative gearing?

A: As a retiree, and depending on who owns your investment property (for example, it may be held in a trust, company, individual name or self-managed superannuation fund), because there are different tax treatments for each structure you may be taxed for income generated for your investment property and you can still claim negative gearing as well. However, depending on your taxable income and structure, you may also be eligible for the senior Australian tax offset (SATO), which can further reduce your income tax liability.

If you were to transfer the property under your mother’s name as a coowner, the tax you would be assessable for and negative gearing will be applied on a pro-rata basis dependant on what your co-share of the property is. This strategy may possibly result in a larger overall tax liability because your mother is a non-resident of Australia for tax purposes, which therefore eliminates the SATO and tax-free thresholds for your mother, plus the possibility of losing any pension and/or retirement benefits that she may be receiving and eligible for. Collectively, your income tax liability may be larger. In addition, if you were to transfer any part of the property under your mother’s name then you may also have a capital gains tax liability, plus your mother would have to pay stamp duty as well. I would strongly encourage you to obtain independent specific advice from your accountant before you do anything further.

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