PPOR with granny flat - CGT & deductibility questions

[Eternal_learner]

Hi folks,

I've been lurking for years, and only randomly had to post as generally a few minutes searching answers any questions I've had.

In preparation with a meeting with my accountant I do now have some questions relating to a potential PPOR purchase that has a separate granny flat. I know that as soon as I rent out the granny flat that I lose a % of CGT exempt status however in the earlier years I need the extra income to be able to afford the type of property we want (up to 5 acres). Indicative figures are $1.0m total purchase, 250k deposit, possible granny flat rent ~300 a week.

My questions are:-
1. What methods can be used to apportion the correct expenses towards the granny flat? Say half the land is rented with the granny flat, how do you determine how much is tax deductible expenses. I'd obtain a depreciation schedule for the GF so the question mainly relates to loan and rates. ATO site suggests floor space when it's a single residence, however can't find guidance when there are 2 + land.
2. Is it possible to ensure all the deposit goes towards reducing the non deductible component of the debt?Would this need a split loan or other special considerations to keep it clean for tax?
3. Once we reach the point that we no longer need the extra income and stop renting the granny flat out does all the property revert to be CGT exempt from this point on? If not is there a way it could be?
4. My last question may be better suited to the Property Finance section however will post it here first. Would the lenders treat all the debt as needing to be serviced without rent, or would they make allowances for renting the granny flat (similar to say assessing me for a 300k investment loan, and 450k PPOR loan).

Any thoughts or comments appreciated. Cheers.

 

[Terryw]

I am no accountant, but

1. I would think you could work it out on a reasonable basis such as land area.

2. Not sure how this could work, but I guess in the land was 1000m2 and the granny flat was 200m2 and it cost $1mil, then you could borrow $800,000 PI and $200,000 IO and argue that the smaller loan is for the investment portion. This would be like partitioning the land and loan into separate amounts.

Not sure what you could do about the deposit though.

3. Just starting living in the whole property again and it all becomes the main residence

4. I don't think a lender would take the rent for the GF into account initially. For subsequent loans maybe they would if the income could be proven.

 

[Rolf Latham]

4. My last question may be better suited to the Property Finance section however will post it here first. Would the lenders treat all the debt as needing to be serviced without rent, or would they make allowances for renting the granny flat (similar to say assessing me for a 300k investment loan, and 450k PPOR loan).

I think that will come down to a few things including, the lender, is the granny council approved for separate letting, the LVR etc

ta
rolf

 

[DrRudi]

The apportionment is based on market value.

You could tailor the lease agreement to meet your requirements as well.

Let's say you bought 5 acres for $500,000 and spent $200,000 on building the house and $100,000 on building the granny flat.

If you wanted the cashflow now and weren't concerned with CGT - you could make the lease agreement for 4 acres and leave yourself 1 acre for the PPOR. If it wasn't so much of an issue, you switch that around (4 acres for the PPOR, 1 acre for the granny flat).

The first option would give a cost base of $300,000 for the house ($100,000 land, $200,000 house) and $500,000 for the granny flat ($400,000 land, $100,000 granny flat).

Say you left it like that for 5 years, then stopped renting out the granny flat and kept it for your personal use for 5 years.

MV after 5 years was house + 1 acre = $500,000 and granny flat + 4 acres = $700,000.

Effectively, when you dispose of the block, house and granny flat in 10 years would have a $200,000 capital gain to declare ($700,000 MV - $500,000 cost).

The second option would give a cost base of $600,000 for the house + 4 acres and $200,000 for the granny flat + 1 acre.

MV after 5 years was house + 4 acres = $900,000 and granny flat + 4 acres = $300,000.

Hence your capital gain would be $100,000 ($300,000 MV - $200,000 cost).

Hope that helps.

That'll be $500.00 thanks

 

[DrRudi]

Also, just to clarify I haven't factored in the 20,000 sqm limit on main residence exemption adjacent land in my example

 

[Mry]

If you buy an existing house and granny flat on one title, it is my opinion that you won't be able to split the interest between the two assets because there aren't two assets, there is only one being a piece of land with two residences on it. You will incur interest, and you will have to apportion it.

IT 2167 deals with apportionment when it comes to how properties are split up when part of it is rented out. The floor space of all housing on the land broken up is the right way to do it, not on the land.
http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2167/nat/ato/00001

I would recommend you have a look at this private binding ruling as it will answer the questions you have, and also the questions you haven't asked yet.
http://www.ato.gov.au/corporate/content.aspx?doc=/rba/content/48928.htm

 

[Eternal_learner]

OK thanks guys for your input. I'll summarise for my own benefit.

Based on MRY’s ATO posts there’d be no issues with using floorspace to apportion costs however this may result in a small deductible % as no consideration is given to the amount of land included in any lease.

However they do also allow for alternate methods if they can be substantiated. One such method is as DrRudi posts that may be more beneficial. To do this I’d need a depreciation schedule for both the main and granny residence to ascertain the correct building cost for each building at the time of construction and now. Purchase price less the current building values would be what you are left with for land value. The onus is on me to demonstrate that this is a fair and reasonable method of apportioning.

As the property is a single asset and any costs need to be apportioned this also flows onto the deposit which would also have the same applied. This means I may not be able to attribute all my deposit against the non deductible expense I’m thinking there may still be an opportunity with a strategically placed offset account though.

Treatment from lenders will depend on my situation and the individual property and I’m best to consult a forum contributing broker like Rolf for assistance

General agreement is that once I stop renting the GF and effectively use all the property for personal use that no further CGT is incurred. All needs to be less than 20,000m2 under the main residence exemption.

This has given me plenty to crunch the numbers on and discuss with the accountant. Thanks.