Ask Ban Tacs Question
Hi, my wife & myself are looking to buy a 60 hectare block of rural land, about 20mins drive from Warwick, Qld. There are no buildings, sheds on the land. The rural land cannot be subdivided. We will be borrowing some money to buy the land and would like to be able to claim the loan interest as a tax deduction.
Our first idea would be to use the land for agistment of beef cattle. As we would be earning an income, then should be able to claim interest as a tax deduction? The next stage would be to have a house/cottage on the property and rent it out, which would allow us to claim the interest.
We are both working as employees, working full time & part time. Are there any other things that we should be aware of? Any advice in general and with respect to the above questions is appreciated.
Many thanks, Victor
Answer
Agistment on its own will only let you claim enough interest to offset the income received, no negative gear. The convention is that agistment is not a true use of land just a temporary measure or something you do while putting it to another use. That other use determines whether it qualifies to be negatively geared. Do you have any experience with cattle? I think you might have to run your own. But the great thing about that is, if you can do that for 7.5 years (or half the time you own it, which ever is the shortest period) the property may (I say may because there are a few other tests designed to exclude big businesses from this concession) qualify for the small business CGT concession. Which if used carefully could mean no tax at all on any gain when you sell the property.
Getting back to claiming the interest as a tax deduction and fencing depreciation, rates etc for that matter. I assume that the cattle income still won’t be enough to offset the interest etc so still negatively geared. This will make the business non commercial and there are rules about offsetting this against other income. Here is my booklet on non commercial losses showing the various options that will allow the losses to be offset. https://www.bantacs.com.au/booklets/Division_35_Offsetting_Business_Losses_Booklet.pdf Assuming each of you have an adjusted taxable income of more than $40,000 as other income but each less than $250,000. You need to pass one of the following tests to be able to offset your losses against your other income otherwise the loss is quarantined until that business does make profits. Note this is profits from the business not necessarily from the land so won’t be able to be offset against rental income. The three tests:
- The value of real property used in carrying on the business is at least $500,000
- The value of other assets used in carrying on a business is at least $100,000.
- Your turnover was over $20,000 for the year.
So I hope the land cost you more than $500,000. If none of these apply, let me know and we can look into other ways such as salary sacrificing the business expenses utilizing the otherwise deductible rule. Or qualifying every second year with $20,000 in sales.
Regarding building the rental. You will not be able to claim any expenses in regard to that area on the property until it is first available for rent. https://bantacs.com.au/Jblog/claiming-property-expense-when-not-rented/#more-369 If at this stage you want to get rid of the cattle then you could set up a lease that does give the tenant access to the whole property ie horsey people, to get the whole deduction. But the cattle are still the best option until you get that 7.5 years up as those small business concessions cannot apply to a rental property.
Before you buy it is worth doing the numbers and getting out the crystal ball to decide who’s name to buy the property in.
