Accountant advised not to claim as rental

Yep, so I agree with your accountant then. I guess this situation is similar to buying a beach house and loaning it to friends rent free. We have a beach house and when we sell it we will have to pay CGT if we make a profit. So anything we spend now we will use to reduce our base. But in SA, still have to pay Land Tax though - but then our state government cant stand not getting into our wallets, greedy that they are. And these taxes were supposed to be abolished with GST!

I think with the Fraud thing comes when there is actually money changing hands, but I guess if there is no rental agreement in place it cant be tracked?
 
So you're saying that they are better off adding all expenses to reduce further (possible) CGT rather than declaring it rented at market value, and getting cashflow now to help them fund it?

I still don't really see the benefit in that. CGT can be reduced if you can pick the most beneficial time to sell and can structure your affairs in such a way to either reduce or eliminate it altogether.
 
No, just that what I am saying is legal and maybe what they are trying to do isnt. If they declare it to the ATO as being rented (even if to family members at a reduced rental but which they are subsidisingto make it market rent and this means that they will have to declare their own money contributions as Rental Income in their Tax returns) and then go on to claim the normal expenses of maintaining a property for investment purposes (eg Interest paid, Council rates etc etc) and then they declare to the ACT Land Tax that it isnt being rented - I think that is illegal and the ACT Revenue Office may well have access to their ATO records and catch them out.
 
I think you've misunderstood me. IF they claim it on their tax returns as being rented, they will definitely be telling the Govt that it is being rented, and will be paying the land tax.

My questioning is that by declaring that it is unrented, and therefore not claiming it on their tax returns, and foregoing any tax refund cos of neg gearing benefits, they are saving but $821 per year in land tax, and reducing their future capital gain by the expenses incurred now.

So, they either say it's rented, and pay land tax, and get a tax refund of between $3K and $6K, and pay a higher capital gain IF they sell and have no way of reducing it.

OR they say it's unrented, don't pay $821 land tax, and DON't get a tax refund, but pay less CGT IF they sell in the future.

There is absolutely no intention of being fraudulent in anything that they do - certainly not to save a lousy $821.
 
Thanks Melbear, got you now!

Now, why would they pay a higher CGT if it is claimed as an Investment property? It is the same GST rate whether you rent or not (ie holiday home is the same as an IP for CGT purposes).

The main downside I can see from claiming it as a rental property, is that if they 'contribute' their own money to make up for the shortfall in rent (to make it market rental) they will also have to state the amount of the shortfall (Plus the rent that the parents pay) as Income. Kind of a double whammy - not only do they not get this money from the parents, but they will have to claim it as rental income even though it has come 'from their own pocket'. But they may be able to claim things like depreciation etc which in the first year, will certainly decrease the tax they need to pay.
 
I think you've misunderstood me. IF they claim it on their tax returns as being rented, they will definitely be telling the Govt that it is being rented, and will be paying the land tax.

My questioning is that by declaring that it is unrented, and therefore not claiming it on their tax returns, and foregoing any tax refund cos of neg gearing benefits, they are saving but $821 per year in land tax, and reducing their future capital gain by the expenses incurred now.

So, they either say it's rented, and pay land tax, and get a tax refund of between $3K and $6K, and pay a higher capital gain IF they sell and have no way of reducing it.

OR they say it's unrented, don't pay $821 land tax, and DON't get a tax refund, but pay less CGT IF they sell in the future.

There is absolutely no intention of being fraudulent in anything that they do - certainly not to save a lousy $821.


I'm with you Melbear,

To me, it sort of sounds a bit like "one in the hand is worth two in the bush".

They are thinking of fore-going the Land Tax now, and decreasing the future cap gains tax by not claiming the expenses and declaring the rent now.

But they may not sell in the future, or they may sell and be able to minimise the cap gains tax when they do. Worry about that if and when the time comes.

In the mean time, they are missing out on all the rent and tax benefits on the property now. I don't know that trying to dodge the land tax is worth it, and the future cap gains tax is a possible problem way off in the future. In my opinion, the cap gains tax isn't really a problem; they will still be making a profit - just not as big.
 
The other thing is that in ACT we get to claim stamp duty as a tax deduction :) because it's actually all leasehold land. We don't actually pay any 'rent' as such on our lease, and it's a 99 year lease, which I believe can be extended up to 99 years at any time for a fee of about $450. We pay the rates etc. but no 'rent'.

So by not claiming as investment, they've also got this one off $13K tax deduction that just goes begging!
 
Risk Reduction

While the tax implications are beyond me as an outsider, I feel it could be a good risk reduction option for the parents to use their funds to invest in the new home thereby lowering the mortgage needed and interest payments.

The much more comfortable LVR could give later flexability to captialiase some interest in a time of difficulty.

The income (interest saved) might not be as much as some market investments but the security would be much greater.

The situation if the parents current ideas of a market investment tips over could leave both families homeless.

The uncertainty and risk world wide is high.

Any investment paying an after tax return greater than mortgage interest rates has a risk of volitility and capital loss.
 
Why not go into a partnership Home in parents and childs names or a trust. Then there may be a saving on sale re cgt . The parents can then reverse morgage for money to live on ???? any one know more about the details.
 
The parents are too selfish and are not willing to 'give up' their funds to their daughter to make the house more affordable. When she did suggest that to them they accused her of being unreliable:(.

Long story short, the purchase hasn't happened - the other two sisters got involved, but wouldn't support what my mate wanted to do to help her parents out. They were concerned that their inheritance would vanish!

The new plan for the parents is to reverse mortgage their current house - in the sticks in a declining town. End result, they be broke within 5 years regardless, sisters have no inheritance anyway, and things are desperate for the parents. Lose/lose.
 
It's an interesting subject. I think a lot of people are in a similar position wanting to help parents out. I would be interested to know if anyone has been able to structure a set up that is win/win for both parties.
 
my parents used to rent out a house to my aunt. She was paying a very low rental, and getting a rental subsidy through centrelink. My parents decided they couldn't keep subsiding the rent, so they looked into the rental subsidy some more. They actually found they could almost double the rent, and my aunt would only pay $5-10 more per week. I don't know all the finer details, but that might be something worth looking into if others are in the same situation.
Pen
 
I think the rental amount is capped at about $52 per week if you are single with no kids and $62 if you have 1 or 2 ($70 if you have 3 or more). You get the max if you pay more than around $120 per week - which I reckon would happen just about anywhere these days. Unfortunately, $120 per week doesn't pay much toward anyone's mortgage these days.
 
The current maximum on this subsidy is $99 a fortnight for a couple (on old age pension) with no dependents.
The amount of rent they must be paying to qualify for all of this is approximately $260 a fortnight or close to that anyway. ( i think ) not much for under that these days! This amount barely keeps up with inflation, let alone gets adjusted for lge rental increases taking place currently.
 
I think your friend's had a lucky escape, Melbear. I have no idea why she'd even contemplated doing this in the first place, given that it doesn't sound like she's rich herself and that the parents don't sound grateful for the help that was offered.
 
Hi allblack, I spoke with staff at aus tax dept last week re: cheap rent for parents in law. They determine the amount you should be receiving by assuming that you are charging reasonable market rent.

Apparently if we don't use a property manager or pay landlords insurance, then these are legitimate amounts we can deduct from reasonable market rent. I then asked them to define reasonable market rent and they told me "whatever the real estate property managers tell you it is worth." This as you know varies from agent to agent!!!

Finally they agreed that if I could provide proof ( newspaper rental classified adds e.t.c.) upon their request that other properties similar to ours were being rented for similar $$$ ( less propoerty management fees and landlords insurance) then this would suffice.

Unfortunately this makes the rent we need to charge in order to please the ATO out of reach for the inlaws. Shame really, coz now it will be up to the government to provide them with "affordable housing".

Regards Jodie
 
ozperp, I think it comes down to what you'd do for family no matter what. My mate was (is) desperate for the folks to live in the same city as her rather than 5 hours away - for the kids to know their grandparents, and so that she can keep an eye on them as their health is failing - at times it seems quite rapidly.
 
My mate was (is) desperate for the folks to live in the same city as her rather than 5 hours away - for the kids to know their grandparents, and so that she can keep an eye on them as their health is failing - at times it seems quite rapidly.
Oh, I see - I got the impression the parents just wanted to live somewhere that they couldn't afford to live! This is a different situation entirely. It's still a huge sacrifice for your friend to bear alone, if her sisters aren't willing to help out. I hope she finds some outcome that works for everybody. That's a tough one.

Hubby and I have one set of parents who are financially independent and could and would help us out if needed (fortunately none of the kids do). The other set of parents live beyond their means and are frequently requesting contributions from their kids for various things. ;) We always joke that eventually when both sets of parents have passed on (and we believe and hope that will be quite some time), we can use what we get from one side to pay off the debts of the other side... :rolleyes:
 
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