​TAX Q&A: Claiming Pre-Purchase Expenses, To sell or rent, and where to stash your cash

By Nila Sweeney | 30 Oct 2014

Q I hope you can assist me. If I was charged expenses relating to loan pre-approval for the purpose of acquiring an investment property, such as valuation fees (private residence for deposit purposes and new investment property) during May/ June and if actual investment/rental property was not settled until the next financial year, July/Aug, in which financial year should/can I claim those deductibles?

Also, if I incurred expenses ie valuation fees, strata inspection fees, from investment property acquisition process that fell through, is there a way that I can claim any of these losses?

Many thanks in advance.

A Expenses incurred relating to loan pre-approval for the purpose of acquiring an investment property are classified as borrowing costs. Unless the total borrowing costss are less than $100 (which can be claimed as an immediate income tax deduction in the year that the loan settles), these must be claimed over a five-year period following settlement date of the loan.

For example, if the total borrowing costs were $4,000, and (in your case), starting from settlement in July/August, your yearly pro-rata borrowing cost income tax deduction will be $800 per annum.

Initial expenses incurred prior settlement and prior to your investment property being available for rent cannot be claimed as income tax deductions because these are capital costs which must form a part of the investment property's capital cost base and can only be claimed if you ever sell the property in the future for capital gains tax purposes. Similarly, if the acquisition process fell through then these costs cannot be claimed as income tax deductions as they are capital costs as well.

 - Angelo Panagopoulos
Q My husband and I are in the market to purchase our first investment property (while renting at our current residence). We have quite a substantial deposit towards our purchase. Wht's the best way to maximise our cash flow?

A When you are on a journey to create wealth using property as a class of asset, it is always prudent to have access to cash. From what I see in practice the best opportunities come in a flash and you need to be ready with your finances to make a quick decision.

We always advice client to have access to spare cash. The best way to do that is to have 'offfset type' interest-only loans.

The concept is that you should borrow the maximum amount the lender will give you. Maximum because as your circumstances change you do not know whether you will be able to access additional loan funds. Changed circumstances include having children and losing a wage while one partner looks after a family.

As I understand it an offset type loan has two components. One is a fully drawn advance. The other is a deposit a/c. Interest is calculated on the net of the two accounts. So as you deposit spare cash in the deposit account the actual interest payable falls. However, the funds are accessible on call as you withdraw from the deposit a/c for the fabulous bargain or opportunity should it come about. It also acts as a nice buffer against contingencies and emergencies.

Note that the offset type loan a/c arrangement is practical for a main residence (MR) where it's likely to be rented out in the future. Consider the situation where a MR is paid off and later used as security for a loan to acquire an upgraded MR. The test for deductibility of interest is how the loan funds are applied. So if the loan funds are used to acquire a home, the interest is not deductible regardless of what security is.

However, when using an offset type loan, the original loan remains in existence and the funds are withdrawn from the deposit a/c. As the property is rented out the interest is deductible.

Consult your accountant for your particular circumstances, and a mortgage broker to explain the features of the various types of loans.

 - Shukir Barbara
Q In 2003 I purchased a property in WA which I used as my PPOR until April 2008, at which time I moved out and commenced using the property as income producing (rented it out). The property is now recently vacant (after being income producing for 6 years and 3 months).

I am now spending approximately $40k renovating the property. The renovations include new kitchen and bathroom, painting all previously painted surfaces and replacement of oven, range hood, toilets and light fixtures throughout. Upon completion of the renovations, I can choose to either sell the property or rent it out again.

If I choose to rent it out again what should I consider to maximise my tax benefit in the following years (ie enlist the services of a quantity surveyor?). sell the property, can I claim all or part of the costs of the renovation? In addition, am I correct in believing that the sale will not attract any capital gains tax because I am entitled to six years CGT exemption for the investment
property as it was initially used as my PPOR?

A As you have initially used your property as your principal place of residence (PPOR) from 2003 to April 2008, there will be no capital gains tax (CGT) applicable during this period. however, if, during the past sic years and three months, you have nominated/purchased another property as your PPOR, CGT will be applicable from April 2008 to the date you sell the property.

If, during the past six years and three month you have not nominated/purchased another property as your principal place of residence (that is, in your case, CGT will apply for the three months beyond April 2014 and onwards).

In relation to the renovations and repairs, firstly, prior to commencing the renovations it may be worthwhile engaging in the services of a quantity surveoyr who can prepare a scrapping schedule. You may be entitled to a partial tax deduction for scrapping the current fixtures and fittings in your property. After the new renovations are completed and if you decide to keep the property as an investment property, you are entitled to claim depreciation on the new renovations (a quantity surveyor should also prepare for you a depreciation schedule) as well.

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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