Hi all,
So this is a fairly long post so I feel that it may scare some readers off haha.
So I submitted a tax question by email to the API magazine tax section around 3 months ago. I looked in the 2-3 previous issues and did not find an answer to my question. However I was reading the latest issue November 2011 and was suprised when I was reading a tax questions and realised 'hey this is my question'.
Anyways looking back now the question was clearly asked by someone who had little idea about all the different taxes regarding property/investment property. I admit I am still a bit unsure of all the different taxes and implications I should be aware of, but have really learnt a lot over the past 3 months from books, this forum, ATO and other websites. Suprisingly the answer was from Julia Hartman who founded BANTACS which is one of the websites I have been reading from over the last few months. I have highlighted the sentences in her response I thought to be most important, these are towards the end of her response - however this is just what I thought looked most important, but than again I have absolutely no tax experience or qualifications! haha.
So try an ignore the silly question I asked and any further advice, comments or thoughts would be greatly appreciated. My parents are currently away in Hawaii for the next 2 weeks but I have told them that I think we should really go see a tax expert to discuss our best options - and we will all do this when they get back - but I thought I would just ask for a few comments from the people of somersoft - as I have generally found that a lot of good responses come from this forum.
API Magazine Tax Question:
Q. I am a 20-year-old with a great interest in property and am currently studying a town planning degree. My parents received some land from a will that has the potential to be subdivided into 20-plus lots. I want to develop this land in 10-20 years but there's currently an old house on it that could achieve $300 per week rent. Is it worth renting out the house for the next 10 years to receive the income or would this lead to us having to pay a large capital gains tax (GCT) bill when we develop the land and sell it?
A. I'm assuming your parents inherited the property in recent years. Renting the property out won't make any difference to the CGT result other than maybe some small write-back of building depreciation which is worth it for the tax deduction against the rent. Generally CGT applies to all assets. It's just the main residence exemption that means GCT may not apply to some homes. It isn't a question of whether the property is used as a rental or not. Even though your parents will be taxed on the rent it is still worth receiving the income because the Australian Tax Office will only want a percentage of the profit and your parents will get a tax deduction for the rates etc.
If they didn't rent it out they would be entitled to reduce the capital gain by the amount of these expenses, but it's still better to have rent income against which the rates etc. will be 100 percent deductible. Because of the 50 per cent CGT discount, including them in the CGT calculation instead will only give you half the benefit of the amount expended.
Further, holding the property as a rental initially may actually reduce the tax on the subdivision. If the development can be considered merely realising an asset rather than a business of property development it could mean no GST and the 50 per cent CGT discount on the sale of the lots, rather than them being fully taxed as the profits of a business.
Strange as it may seem, sub-divisions larger than 20 lots can slip under the GST radar and still qualify to be taxed under the GCT provisions, reference Miscellaneous Tax Ruling 2006/1. Leaving the property vacant suggests the sole purpose in holding the property is for a business-making enterprise of sub-division. If it's held as a rental during that time then it's much more likely to be viewed as an investment which supports the argument that the subdivision is merely realising an asset in the most profitable way rather than a business venture.
Julia Hartman
So this is a fairly long post so I feel that it may scare some readers off haha.
So I submitted a tax question by email to the API magazine tax section around 3 months ago. I looked in the 2-3 previous issues and did not find an answer to my question. However I was reading the latest issue November 2011 and was suprised when I was reading a tax questions and realised 'hey this is my question'.
Anyways looking back now the question was clearly asked by someone who had little idea about all the different taxes regarding property/investment property. I admit I am still a bit unsure of all the different taxes and implications I should be aware of, but have really learnt a lot over the past 3 months from books, this forum, ATO and other websites. Suprisingly the answer was from Julia Hartman who founded BANTACS which is one of the websites I have been reading from over the last few months. I have highlighted the sentences in her response I thought to be most important, these are towards the end of her response - however this is just what I thought looked most important, but than again I have absolutely no tax experience or qualifications! haha.
So try an ignore the silly question I asked and any further advice, comments or thoughts would be greatly appreciated. My parents are currently away in Hawaii for the next 2 weeks but I have told them that I think we should really go see a tax expert to discuss our best options - and we will all do this when they get back - but I thought I would just ask for a few comments from the people of somersoft - as I have generally found that a lot of good responses come from this forum.
API Magazine Tax Question:
Q. I am a 20-year-old with a great interest in property and am currently studying a town planning degree. My parents received some land from a will that has the potential to be subdivided into 20-plus lots. I want to develop this land in 10-20 years but there's currently an old house on it that could achieve $300 per week rent. Is it worth renting out the house for the next 10 years to receive the income or would this lead to us having to pay a large capital gains tax (GCT) bill when we develop the land and sell it?
A. I'm assuming your parents inherited the property in recent years. Renting the property out won't make any difference to the CGT result other than maybe some small write-back of building depreciation which is worth it for the tax deduction against the rent. Generally CGT applies to all assets. It's just the main residence exemption that means GCT may not apply to some homes. It isn't a question of whether the property is used as a rental or not. Even though your parents will be taxed on the rent it is still worth receiving the income because the Australian Tax Office will only want a percentage of the profit and your parents will get a tax deduction for the rates etc.
If they didn't rent it out they would be entitled to reduce the capital gain by the amount of these expenses, but it's still better to have rent income against which the rates etc. will be 100 percent deductible. Because of the 50 per cent CGT discount, including them in the CGT calculation instead will only give you half the benefit of the amount expended.
Further, holding the property as a rental initially may actually reduce the tax on the subdivision. If the development can be considered merely realising an asset rather than a business of property development it could mean no GST and the 50 per cent CGT discount on the sale of the lots, rather than them being fully taxed as the profits of a business.
Strange as it may seem, sub-divisions larger than 20 lots can slip under the GST radar and still qualify to be taxed under the GCT provisions, reference Miscellaneous Tax Ruling 2006/1. Leaving the property vacant suggests the sole purpose in holding the property is for a business-making enterprise of sub-division. If it's held as a rental during that time then it's much more likely to be viewed as an investment which supports the argument that the subdivision is merely realising an asset in the most profitable way rather than a business venture.
Julia Hartman
