his is a capital gains question specific to my circumstances – will give you the details and if you can confirm whether it will be a $39.95 special or otherwise the cost involved and how I go about paying.
Bought a property jointly about 10 years ago and we are now divorcing so we have to sell. The price has appreciated quite a bit and we want to minimize capital gains and have an approximate figure as to what sum we would be looking at.
Purchase Price: $148,438.80 (Looking to sell at $900,000)
Capital Expenses: $14,437.00
(Have no paperwork, but spoke to State Revenue Office. Contract was signed July 1998 and based on purchase price I work stamp duty to come to $4566.32 (are you able to check these figures?) A number of years later we changed loans and got charged a further $800.00)
My taxable income for 2008 $38117
Patrick’s taxable Income 2008 $30495
We never lived on the property. There was an old home on the premises which we demolished. We rented the property out as a car park for the first time as of 10/11/03 and we have shared income and expenses equally. We have an ABN for the carpark registered to us as individuals as of 1/9/03 and tax file number as of 30/9/03.
As of our 2004 tax returns we have been showing income for the business and claiming associated expenses (interest, rates, repairs etc). We have always claimed a loss and that has gone off the income we received from our individual wages. This took place till our return lodged in 2006. Our 2007 and 2008 returns, the income from the carpark has been lodged by our accountant as rental income. As of August 2008 we entered into a 1 year lease agreement with a company who are using the property for storage and have erected a hot house for their plants.
Think I have covered it all – Can it be considered a business even though our income is from the rental of the property as we have registered an ABN? If not can we make allowances in the profit for the years in which we did not receive income from the property? Basically after the best case scenario for us.
There was no one at the site on a daily basis to collect money. However we door knocked around the area to drum up business, made up our own flyers / adverts and handed those out on a regular basis. We had individual short term clients at regular intervals but when we could get a group in from the one company we would do that. We had keys cut for everyone so they could come and go as they needed to. We maintained the property and when we had mixed groups in we had to occasionally organise to have cars moved if they were in the way. Payment is either via direct credit to our account or I organised bank slips for those that preferred going into the bank. And ofcourse ensure payments are made when they’re meant to be, issue receipts and maintain record of payments and expenses as well as updating clients details on our files so we know who is meant to be parking in there.
I am looking at trying to classify the property as an active asset. If it qualifies then providing you have business assets of less than $6 million or a turnover less than $2 million you can utilise the small business CGT concessions. After the 50% CGT discount you get another 50% active asset discount so now only 25% of the gain is taxable. You can choose to accept this or utilise rollover relief to purchase another business asset or instead or in conjunction utilise the retirement exemption which if you are over 55 means you can take that amount tax free as well. If you are under 55 and use the retirement exemption you can put the balance into superannuation and it will not be taxed in the hands of the super fund. Certainly worth trying for because in effect it means no CGT at all!
Paragraph 152-40(4)(e) excludes from the definition of active assets those whose main use is to derive rent. Further the asset has to be used as an active asset for at least half the time you owned it or 7 ½ years which ever is the shortest period.
TD 2006/78 recognises there are situations when you receive what appears to be rent but you are actually running a business. Examples given are a self storage operation and holiday cottages.
The key paragraph in this ruling for you is number 23:
A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession. If for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.
It is well worth pursuing this angle as your CGT will be huge. It is certainly worth applying for a ruling on your particular circumstances and studying TD 2006/78.
If it can be considered an active asset you are not out of the woods yet. The rental of the property to the people with the hot house is not a period that the land will be considered an active asset and for at least half the time or 7 ½ years which every is the shortest it has to be used as an active asset. To Date the tally is
Non Active Active
Before Car Park 5 years 2months Car Park 4 years 9 months
Hot House 8mths
You need to get it back to being a car park (subject to a ruling agreeing that as such it is an active asset) and keep it that way for over a year to qualify. Well worth it considering the huge CGT bill you are looking at (well over $100,000).
The original purchase price of the property still applies to your cost base even though the house was demolished in fact you can even increase your cost base by demolishing costs.
The fact that you have included car park income in a rental schedule should not make any difference to the facts of the case which will determine whether it is an active asset. Nevertheless, you should stop doing this asap and lodge a partnership return with that TFN they gave you with the abn. This will not prevent you being able to offset the loss against your wages.