CGT Deferral

[simonjulie]

Hi All
Was just reading the latests Robert Kiyosaki book "Rich Dad's Prophecy" and have a question for the Gurus.
In chapter 14 he describes how he moved from doing small deals to big deals by selling his small deals and deferring the CGT with a tax deferred 1031 exchange.
I know that this is an American thing but my question is.
Is it possible to achieve a similar outcome in Australia?
Kind regards
Simon

 

[DaleGG]

Hi Simon

No, not with property you can't. You can with active assets such as businesses, but passive assets such as investment properties are not eligible for this deferral.

Sorry to bear bad news.

Dale

 

[h8dk97]

Originally posted by DaleGG
Hi Simon

No, not with property you can't. You can with active assets such as businesses, but passive assets such as investment properties are not eligible for this deferral.

Sorry to bear bad news.

Dale

Hi Dale,

Would that mean that if I sell my business and invest the profit I got from it in something else I can deffer my tax, how long for?
Thank you.

 

[DaleGG]

Originally posted by h8dk97
Hi Dale,

Would that mean that if I sell my business and invest the profit I got from it in something else I can deffer my tax, how long for?
Thank you.

Hi Jerry

Yes, it would and I'm sorry but I don't have that extra information at home with me.

Dale

 

[simonjulie]

Thanks Dale
So what if your investment business is or incorporates trading of property as a primary source of income? Would one then have an argument for tax deferral of CGT.
Kind regards
Simon

 

[Chris G]

Hi Simon,

If your business is primarily trading in property then the properties are treated as trading stock. Therefore CGT is not applicable and any profits are simply treated as income.

Hope it helps.

Cheers
Chris

 

[simonjulie]

Thanks Chris
That sounds a bit scary ( Paying Income Tax)
Little wonder investors choose to buy hold then refinance, to buy hold and then refinance etc.
Whoops.... I forgot the serviceability thing the lenders always seem to think is important. That always seems to put one off their game a little.
It seems to me that Robert Kiyoski got on to the fast track "the American way" while us Ozzys are left scratching our heads as to the next step forward. Any Ideas?
Kind regards
Simon

 

[paulzag]

That's one reason why Robert Kiyosaki won't invest in Australia. He says our tax laws are anti-investment.

Aussie's need to do deals that make sense with and without the tax consequences (tax refund and CGT)

Regards

Paul Zag
Dreamspinner

 

[Chris G]

Hi,

I've heard from others that invest in the US from AU that their US income can be taxed in the US? If thats the case are you also able to use the 1031 exchange and deferr CGT or is this limited to US citizens?

Cheers
Chris

 

[beech]

hi Chris G can you define (trading property ) for me please?



thanx Darren

 

[Chris G]

Hi,

From previous posts by Dale the definition of "trading property" as a business is not easy to nail down. Guess it is like justifying that a hobby is infact a business. Factors like frequency of purchase/sale, advertising to the general public, $ involved, structure of the venture (business names, company etc etc) might all be taken in to account by the ATO when deciding if you are infact running a business or merely investing in property.

Just my thoughts. Dale probably has a more accurate answer.

Cheers
Chris

 

[DaleGG]

Originally posted by Chris G
Hi Simon,

If your business is primarily trading in property then the properties are treated as trading stock. Therefore CGT is not applicable and any profits are simply treated as income.

Hope it helps.

Cheers
Chris

Hi

This is correct. hey, Chris, do you want a job???

Have fun

Dale

 

[h8dk97]

Originally posted by DaleGG
Hi Jerry

Yes, it would and I'm sorry but I don't have that extra information at home with me.

Dale

Here's something I found on business channel Victoria:

Rollover Relief
From 1 July 1997 new measures provide rollover relief to small business owners who sell assets in order to buy other assets for use in a business. These measures mean that assets can be sold and the proceeds reinvested in new business assets without attracting Capital Gains Tax at the time of the sale. Tax liability on the rolled-over capital gain is deferred until the replacement asset is disposed of unless that sale also attracts rollover relief or some other relief under the capital gains tax provisions.

These measures will apply to a wide range of assets that include:
equipment and machinery;
goodwill;
land;
mining rights;
intellectual property; and
government licences.

The main conditions applying to rollover relief claims are:
- the net value of the taxpayer's various business assets (excluding assets used solely for personal use) cannot exceed $5 million;
- assets sold must be those actively used in a business carried on by the taxpayer;
- new replacement business assets must be purchased in the period one year before and two years after disposal;
- any claim for relief must be made on or before lodging your income tax return; and
- relief is not available if an asset being sold has been part of another small business rollover in the previous five years.

Could a rental property be "an actively used business asset"? and if yes in what circumstances?
Thanks.

 

[DaleGG]

Originally posted by h8dk97
Could a rental property be "an actively used business asset"? and if yes in what circumstances?
Thanks.

Hi jerry

No, the law defines what is and what is not an active asset and rental properties are not active. Sorry.

Dale

 

[Chris G]

Originally posted by DaleGG
Chris, do you want a job???

Hi Dale. Thanks for the offer. hehe. Email me the details of the position and then we can talk $!!! lol

Do you (or anyone else...Jeremy?) have any insights into the question of whether the 1031 exchange (CGT deferral) is available to foreigners investing in the US or only US citizens? (US income being taxed in the US so ALL the US tax regs apply?)

Cheers
Chris

 

[DaleGG]

Hiya Chris

No, I'm afraid that I know virtually nothing of any use or value about the US tax laws. I leave that to the experts.

Sorry

Dale

 

[simonjulie]

Hi All
Thanks for the responses to my post
Now let me get this straight
1 Rental property is not an active asset
What if the property is Cash Flow + ?
2 If one were to sell that property it would attract CGT.
If one had a large number of rental properties and stock for trading would the portfolio be looked at as active assets or a hobby that attracts CGT on the sales only and tax on the + Cash Flow.
Still confused
Simon

 

[DaleGG]

Originally posted by simonjulie
Hi All
Thanks for the responses to my post
Now let me get this straight
1 Rental property is not an active asset
What if the property is Cash Flow + ?
2 If one were to sell that property it would attract CGT.
If one had a large number of rental properties and stock for trading would the portfolio be looked at as active assets or a hobby that attracts CGT on the sales only and tax on the + Cash Flow.
Still confused
Simon

Hi Simon

Property is defined as a passive asset and therefore there is no CGT exemption when it is sold. If it were a passive asset, then we could defer CGT like the Americans. This is so regardless of what type of properrty and whether or not it is positive or negative income produing.

So, yes, the sale of a single IP will attract CGT.

If you have a large number of IP's that produce rental income, the CGT rules apply.

If you buy property for resale, then it is stock on hand which means that the CGT rules do not apply. So, this would mean that the sale is ordinary income of the entity that sold the property.

Does this make it a little easier?

Tax is not easy and does not make sense in most cases.

Have fun

Dale

 

[simonjulie]

Thanks Dale
It is interesting to note that when an investor accumulates a substantial property portfolio that they find themselves with an identity crisis in regards to what they are. Meaning, to the lenders they are looked at as a business if they are self sustaining and as an investor if they have other income to prop up their investments. And then there is the ATO's purseption of the investor as well.
I believe it comes down to wearing the appropriate hat for the best outcome.
Kind regards
Simon