Tax Q&A: Your tax questions answered

By Nila Sweeney | 16 Apr 2015

Our tax experts are on  hand to answer any tax queries you may have regarding your property investments and wealth creation strategies. Email your taxing questions to [email protected]

Claiming repairs on principal place of residence turned rental property

Q: We have been living in our PPOR for 10 years and are thinking of renting it out. Our main bathroom leaks and requires replacing at a cost of around $20,000. If we were to move out prior to replacing the bathroom and finding a tenant, would this be tax deductible? Also, if we were to move back in at a later date, are there rules around how long we would need to be away in order to claim the costs of the bathroom?

A: When you move out of your principal place of residence and then begin to use it for income-producing purposes, the rental income will be assessable income and all outgoings incurred to produce the assessable income will also be tax deductible for income tax purposes.

Replacing the bathroom is an improvement (as opposed to a repair), and, for tax purposes, replacement of the overall bathroom is treated as a capital expense.

Capital expenses are depreciable over the useful life of the bathroom, and the annual depreciation rates can vary from 2.5% to 30%. The safest way to arrive at the value for all the depreciable items is to engage the services of a quantity surveyor by assessing the value of the bathroom replacement and maximise your overall taxable deductions.

You can only claim deductions for the period during the year that the property is rented or is available for rent once the bathroom improvement is completed.

Subsequently, if you were to move back in at a later date, this  therefore would mean that you would no longer be using this property for income-producing purposes, hence you would no longer be allowed to claim the property’s outgoings either (including depreciation and interest expense on the loan).

There is no actual minimum period for when you would be required to be away from the property (in order to claim the depreciation); however, as long as the property is made available for rent and is used for income-producing purposes (no matter the duration) then you will be generally allowed to claim the expenses for income tax purposes.

– Angelo Panagopoulos

Reducing CGT

Q: I have read your magazine and would like to ask about a capital gains tax issue. I have just sold my investment property; how can I reduce the CGT? I am no longer working, was divorced in 1996, and I have the full share of the property since my divorce.

My ex-husband has borrowed $120,000 from the bank for a second mortgage on this property without my knowledge, so with my solicitor's advice I accepted to pay $25,000 to the bank in order to get the property in my name. Can I add $25,000 on the cost of my property when claiming the CGT?

According to the solicitor, $25,000 will be equivalent to the cost of the legal fee if I want to challenge the bank, and it was less stress to resolve the problem.

A: When a property is first acquired, it can be established either as a main residence or as a rental investment. Where the property is first established as an investment property and continues to be so, capital gains (CG) will be taxed where it is subsequently sold at a profit.

Where the property is jointly owned, each owner has a 50% equity in the property. If 50% of the equity is transferred from one to the other joint owner on marriage breakdown, CG is not taxed and is rolled over to a time when the property is sold. The 50% interest transferred will have the same ownership features that belonged to the transferor. In this case it appears it will be the same for yourself, including the same cost base.

On sale of the property, CG is calculated as the difference between the sale price and the cost base. The cost base includes purchase price, stamp duty, legal fees, renovations, and repairs when the property was fi rst acquired. It also includes the selling agent’s fees, legal fees on selling, agent’s fees for marketing the property, etc.

As the property has been owned for longer than 12 months, a 50% discount of the calculated CG is available as a concession. This means that only 50% is actually assessable – included on the tax return.

Regretfully, loans are not considered in CGT calculations. I presume this would have been accounted for at the marriage breakdown settlement stage. I assume the interest on the loan would have been claimed as a deduction against the rental income.

If you are holding on to proceeds of sale in a cash deposit account, then using a term deposit where the interest income is not paid until July of next year means your taxable income will be lower for this year, thus saving on tax – increased by the CG.

Depending on what other income you have, deferring these till the next year means they will be taxed when your marginal tax rate is lower.

– 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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