Is this considered an IP

[fuister]

Hi All,

I have just purchased a property in Perth. It is going to be our ppor. However we are only going to move into it in june as there are tennants there and we are renting ourselves. My question is can the property be considered an IP up until June even though we want to eventually make it our PPOR? I intend to ask an accountant but I usually come here first so I dont get swindled.

Would appreciate your comments.

 

[Propertunity]

Yes it will be an IP until you move in and make it your PPOR.......and it will have some CGT liability if you ever sell.

 

[tgarthe]

Won't be any CGT if there was a lease in place at time of sale and the intention is to move in as soon as the lease is finished.

 

[Rob G.]

Won't be any CGT if there was a lease in place at time of sale and the intention is to move in as soon as the lease is finished.

Where do you get that interpretation of s.118-135 from ?

Explanatory Memorandum to Tax Law Improvement Act (No.1) 1998

ATO ID 2001/744

NTLG Losses and CGT Sub-committee (CGT session) minutes - 12 November 2003

Caller & Anor v FC of T 2009 ATC

Cheers,

Rob

 

[tgarthe]

That section effectively provides that as long as taxpayers move into their new home as soon as “first practicable”

http://ww5.cch.com.au/atw/atw1.html

 

[Rob G.]

That section effectively provides that as long as taxpayers move into their new home as soon as “first practicable”

http://ww5.cch.com.au/atw/atw1.html

The explanatory memorandum specifically excludes where a property is taken without vacant possession.

The ATO takes a hard line on this one, and Case Law seems to back the Commissioner up on his narrow interpretation of "as soon as practicable".

Cheers,

Rob

 

[fuister]

"As soon as practicable" for me would be after our lease expires as i do not want to incur any penalty fees. That sounds reasonable to me - hopefully the ATO thinks like me

 

[fuister]

By the way, thanks as always for your responses.

 

[coastymike]

tgarthe

As stated in the CCH article "The wording used by the AAT: “any period during which the property is let out and rent is being derived by the taxpayer will not qualify for the exemption” [emphasis added] also potentially leaves the door open to taxpayers in the Caller’s circumstances to claim the main residence exemption for any period during which the property is on the rental market but is not occupied (which may be several months), as during that period “rent would not be derived” by the taxpayers despite the property being used for an income-producing purpose (which would allow interest deductions) — it is not clear whether this is an intended result."

Based on the decision made by the AAT why would the period during which fuister had the property deriving rent be eligible for the main residence exemption ? This seems to be contrary to the decision made by the AAT.

 

[Melbournian]

But what if the lease is already in place - what can the buyer do about it anyway?

 

[Propertunity]

But what if the lease is already in place - what can the buyer do about it anyway?

All the purchaser can do is:
1. Buy some other property that does not have a lease in place already
2. Delay the settlement until the lease officially ends
3. Attempt to have the tenants move out early (i.e. break their lease)

 

[tgarthe]

Just found this as well.

http://www.ato.gov.au/individuals/content.asp?doc=/content/36888.htm

If you could not move in because the dwelling was being rented to someone, you are not considered to have moved in as soon as practicable after you acquired your ownership interest.

Still think it's a grey area.

 

[Perp]

It doesn't sound like there's any grey to me; the main residence CGT exemption won't apply until the purchaser moves in. You've just backed everybody else, tgarthe, with another example of your own.

Where are you seeing anything other than black and white?

 

[tgarthe]

I agree with what everyone has said don't get me wrong, I only browsed the case quickly and thought the case was a pretty extreme example of trying to claim the exemption was all.

I am a tax accountant from years past so obviously I am loosing touch

Ta

 

[Perp]

I'm certain he told me that the exemption applied provided you move in as soon as practicable, so if there's a lease in place at the time of purchase, it is somewhat arguable though the ATO will determine this on a case by case basis depending on the facts. The ATO must have changed its mind since then.

That's certainly sounds plausible. In any case, the ATO clearly now holds the position that an existing lease is not sufficient justification for not moving in immediately.

Yet another example - if more were needed! - of how important it is to get good advice prior to entering into a purchase contract. Many "mistakes" are unable to be inexpensively corrected after the fact. Ouch.

 

[fuister]

Hi All, a follow up question:

The house settles in March. It will be rented out until July and after that I will move in. However, before I move in there will be repairs that I will need to carry out e.g. carpet change, timber polish, replacement of air con. Can I claim these as a tax deduction?? it is genuine in that it was due to tenants that I have to change them out.

 

[Ed Barton]

Hi All, a follow up question:

The house settles in March. It will be rented out until July and after that I will move in. However, before I move in there will be repairs that I will need to carry out e.g. carpet change, timber polish, replacement of air con. Can I claim these as a tax deduction?? it is genuine in that it was due to tenants that I have to change them out.

so you haven't even settled and you know the tenants are going to do that much wear and tear in a few months that everything needs upgrading? sounds like a tax dodge. ato doesn't like tax dodges.

some will be repairs and some capital works. see an accountant or visit the ato site.

 

[Marty McDonald]

Back to the cgt issue. Do you really expect the propery to materially increase in value in the few months it is tennanted? The cgt will only apply to any increase in value during the time it's rented. On that basis ask an agent to give you an appraisal at the time you move in and ask for it to be on the low end, your first port of call would be the selling agent. They always try and market to the buyers anyway so I am sure they would oblidge. Keep the appraisal filed away so when you sell you can show you have no or very little cgt liability.

In terms of doing up and claiming deductions the probl there is if you actually add value you may increase your cg liability although if it's not maintenance but true improvements the costs can't be claimed as deductible anyway, they should be added to the cost base of the asset. That's my understanding anyway.

 

[Jeith]

Back to the cgt issue. Do you really expect the propery to materially increase in value in the few months it is tennanted? The cgt will only apply to any increase in value during the time it's rented. On that basis ask an agent to give you an appraisal at the time you move in and ask for it to be on the low end, your first port of call would be the selling agent. They always try and market to the buyers anyway so I am sure they would oblidge. Keep the appraisal filed away so when you sell you can show you have no or very little cgt liability.

An appraisal or valuation would only be acceptable if it was PPOR first and then an IP.

If it is an IP first & then PPOR (as in this instance); then when the property is sold in the future any gain will be apportioned based on the period it was an IP.

 

[Perp]

What Jeith said.