Loop Hole or Not?

[flaxmac]

Hi All,

Just a couple of questions about CGT and Deductions.

2012 Father/Husband buys IP for $600K (10 years Interest Only Loan)

Valuation Done = $600K

2012 (One month later) Father/Husband sells IP to Daughter/Wife for $600K, But with a delayed settlement for 10 years.

2022 Settlement occurs.

2022 Daughter/Wife lives in the property and claims it as PPOR from 2022 until 2023. (for 1 year)

2024 Daughter/Wife sells property for $1.2Mil.



Question 1: Can Father/Husband claim interest paid over the 10 years as a tax deduction?

Question 2: Can Daughter/Wife claim profit made by sale as no CGT payable?

Question 3: Is this a way-a-round this rule from ATO: http://www.ato.gov.au/individuals/content.aspx?doc=/content/63460.htm

 

[rowena]

I thought it depended on contract dates not settlement dates... so all to do when the contract was signed... i would definatley be seeking advice on this. The other thing is in the next 10 years ATO could change their rulings, and so this might change your plans and then your bound by the contract you signed years earlier, and i wouldnt personally do a 10 yr settlement as a lot can happen in those 10 yrs!. divorce/death/financial situation may of changed just to name a couple.

 

[INXS]

Hi All,

Question 1: Can Father/Husband claim interest paid over the 10 years as a tax deduction?

Question 2: Can Daughter/Wife claim profit made by sale as no CGT payable?

Question 3: Is this a way-a-round this rule from ATO: http://www.ato.gov.au/individuals/content.aspx?doc=/content/63460.htm

Why not live in property for 3 months after purchase. Then rent out for 5 years and 11 months. Then move back in for 3 months. Then rent out for another 5 years 11 months, before selling. No CGT as long as you don't have another PPR.

 

[coastymike]

Cgt is from contract date. Therefore daughter will be liable for cgt that occurs during period of settlement.

Father has sold property so interest no longer deductible.

Terrible position for both parties.

 

[redwing]

The Husbands involved from the start also?

 

[Mry]

Father has sold property so interest no longer deductible.

Coasty, what if the father continued to rent the property out during the overly long settlement period?

 

[coastymike]

Generally, where the relevant income earning activities have ceased, the interest incurred will not be deductible if the taxpayer:

· keeps the loan for reasons unassociated with the former income earning activities, or

· makes a conscious decision to extend the loan in a way so as there is an ongoing commercial advantage to be derived which is unrelated to the income earning activity with which the debt was originally incurred.

In these circumstances the nexus between the outgoings of interest and the relevant income earning activity is broken and the interest will not be deductible.

A legal or economic inability to repay the loan would suggest that the loan is not being maintained for the purposes other than the former income earning activities.

Given father has chosen for a long settlement period then the interest on any outstanding liability would be non deductible as he has made a conscious decision to extend the loan which is unrelated to the income earning activity with which the debt was originally incurred.

 

[Rob G.]

Coasty, what if the father continued to rent the property out during the overly long settlement period?

Do you mean a vendor finance type of arrangement ? These facts weren't in the original post.

Daughter pays commercial rent to father during period to settlement ?

Father incurs interest expense in earning assessable rental income.

Much depends upon the facts.

Cheers,

Rob