Tax Q&A: Claiming deductions & Six-year rule CGT calculation

By Nila Sweeney | 07 Aug 2015
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Question 1: Claiming deductions
I would like to buy a block land and build a new house for investment. I have some tax questions below:  
  1. Can I claim interest on the loan to buy the land? How about the interest on the construction loan, is it tax deductible before the construction is completed?
  2. If the property is under a company trust structure, say the net profit is $10,000 after sale. It will be charged 30% tax under the company. Assuming the rest of the $7,000 is distributed to me (beneficiary of the trust), do I have to pay personal income tax for this $7,000?
    For example, my income is $70,000 per year and after receiving $7,000 from the trust, am I to pay tax based on $77,000?
  3. If I signed a contract but terminated it for any reason, can I claim the cost (including lawyer fee)?
If your intention and purpose of purchasing the block of land and constructing a dwelling is for income generating purposes as soon as the property is available for rent (and provided the dwelling is constructed within a reasonable time frame) then the interest expense on the land loan and interest expense on construction loan of the dwelling is fully income tax deductible during the period of construction.
With regards to your second question, if the property is held by a Trust with a Company as Trustee, and provided the Trustee is not assessed for Trustee Withholding Tax (which is best avoided as top marginal tax rates apply), Trusts do not pay 30% tax regardless of whether the trustee is a company or an individual. A corporate trustee (as do individual trustees) only holds the asset(s) in Trust for the beneficiaries. The trust taxable income and capital gains tax is levied at the beneficiaries marginal rates and not the trustee company corporate rates of 30%.
Therefore, in your example, if the taxable net income of the trust is 10k and you, as a beneficiary, is presently entitled to the income (make sure your accountant prepares the Trust Resolutions for this by 30 June every year!), then the $10k distribution is streamed and paid to you and included in addition to all your other taxable income for the relevant year. If your taxable income is $70k from other sources (for example, salary/wages, dividends, interest less allowable income tax deductions), your $10k trust distribution will increase your taxable income to $80k and therefore your marginal income tax rates will be levied on the $80k taxable income.
Regarding your third question, you can claim, but only on the condition that this is not a purchase of your principal place of residence and if this creates a capital loss then it cannot be offset against your assessable income. Rather it is carried forward and can only be applied against future capital gains.

Question 2: Six-year rule CGT calculation
If I move into a property that was rented from day 1, I understand the 6 year rule does not apply. However, how is the CGT calculated when I sell
  • based on the difference between the selling price and the cost base (re-valuation done when I move in)
  • based on the pro-rata years you lived there and the years it was rented out
 These can be two different things as the property may not have appreciated in the first few years when it was rented and seen a big growth towards the end.
If you purchased a property and it was your nominated principal place of residence (provided the property was held in your individual name) from day 1 and subsequently you moved out of this property at a later time to use it for income producing purposes, as long as you didn’t nominate another property as your principal place of residence during this time then a subsequent sale of this property will not be subject to Capital Gains Tax if the period when you were using this property for income producing purposes did not exceed 6 years.
However, if the period for income producing purposes did exceed 6 years then capital gains tax will apply from the additional period after the six year mark. For example, if the property was rented out for eight continuous years, then the capital gains tax period will apply for the two years after the 6 year mark. For calculation of the capital gains, you will be required to obtain a valuation of the property at the 6 year mark and this will be your cost base for capital gains tax purposes. You would then apply any incidental costs and selling costs to this cost base and the difference between this cost base and the selling price will be the gross capital gain. If the selling price is less than the adjusted cost base (at the 6 year mark) then you will have a capital loss.
The pro-rata method for calculating your capital gains tax liability only applies if the property was first acquired and used for income-producing and/or investment purposes from day 1 and then you subsequently moved in to this property to live in and use as your principal place of residence.
There is no requirement for a valuation at any stage of the process as the capital gains tax liability is assessed/calculated on the actual selling price less the actual cost base from date of acquisition on a pro-rate basis. For instance, if you own the property for 1,000 days for which 700 days was used for investment purposes (that is, the property was used as an investment property for 70% of ownership period), then the assessable gross capital gain will be 70% of the actual gain. If there’s an overall initial capital loss, then 70% of the capital loss is required to be treated for tax purposes.
  • 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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