Ask Ban Tacs Question
Approx 2.5 years ago we purchased a vacant block of land on the north coast of NSW. We received a stamp duty concession of approx. 1100.00 as a first time buyer. We had a home designed with council approvals but our circumstances have now changed.
We now reside in central Qld and are in the process of purchasing our first home here and do not plan to proceed with building a home in NSW.
It would appear that not only are we not eligible for any stamp duty concessions in Qld (approx. 11,000) due to the very small concession we took in NSW but in fact may be required to repay the NSW concession as well.
Is this a correct assessment?
In addition, the home we wish to purchase in central Qld has a separate granny flat on the residential property. Can we live in the granny flat and rent out the home and still have it considered our principal residence for CGT purposes?
Answer
We do not cover stamp duty under askbantacs as it varies from state to state but a quick review of the state revenue pages shows that yes you should have to repay the NSW stamp duty because you did not live on the land for 12 months. The following makes it pretty clear that, having owned the land in NSW you will not be entitled to the first home stamp duty concession in Qld.
https://www.osr.qld.gov.au/duties/transfer-duty/exemptions-and-concessions/first-home-concession.shtml
There is however, stamp duty concessions on the purchase of your home
https://www.osr.qld.gov.au/duties/transfer-duty/exemptions-and-concessions/home-concession.shtml
Sorry, web site references is all I can do with stamp duty, not my area of expertise but your question on granny flats is certainly up my alley.
You will not be able to cover, with you main residence exemption, any part of your home that is used to produce income. In your case the 6 year rule (section 118-145) does not apply as it requires you to be absent at the time the property is producing income. This is the case regardless of which part you live in.
But first let’s look at whether there is one dwelling or two separate ones. This is all decided by how you use the property according to TD 1999/69
http://law.ato.gov.au/atolaw/print.htm?DocID=TXD%2FTD199969%2FNAT%2FATO%2F00001&PiT=99991231235958&Life=19991215000001-99991231235959
which looks at how the property is used not the design, to determine whether there are two separate dwellings on the property. If there are two separate dwellings then you can only give your main residence exemption to one. How you treat the property when you first move in there determines whether it is two residences or one. If it is one residence then it can be covered by your main residence exemption when it is not earning income. Either way you are in for a lot of record keeping whichever one you are living in can be covered by your main residence exemption but if they are considered the one dwelling for CGT purpose it will be a matter of apportionment so you will need to keep records for all of the property. Make the most you can of section 110-25(4) which allows you to increase the cost base by any holding costs that have not otherwise been claimed as a tax deduction so even cleaning materials for the dwelling you reside in, can count if it is all considered one dwelling.
Here is an example of the CGT calculation if the property is considered one dwelling ie you initially use both dwellings as your home. Assuming you paid $600,000 (including stamp duty etc) for the property and you rent the property out for 8 of the next 10 years and the area (see IT 2167) you claim as being for your home is 1/3rd of the property with 2/3rds being used to produce income:
Purchase price $600,000
All costs of ownership for the whole property
That has not otherwise been claimed as a tax
Deduction 100,000
Selling costs 20,000
———–
Cost base at time of sale 720,000
Less Selling Price 750,000
———-
Capital gain 30,000
20% of time not a rental 6,000
———-
24,000
1/3rd Covered by the main residence exemption 8,000
———-
Taxable Capital Gain 16,000
Less 50% CGT discount 8,000
——–
Taxed at marginal rate 8,000
If instead the Granny flat was considered a separate property then only its costs would be included in the CGT calculation. Let’s assume the dwelling you use to produce income represents 2/3rds of the property so $400,000 initial cost base you paid. The CGT calculation would be as follows:
Purchase price 400,000
Selling costs 2/3rds of $20,000 13,334
———–
Cost base at time of sale 413,334
Less 2/3rds of selling price 500,000
———-
Taxable Capital gain 86,666
Less 50% CGT discount 43,333
——–
Taxed at marginal rate 43,333
Note this difference will vary depending on the ratio of your holding costs ($100,000) above, to the capital gain on your main residence. The above is to show you how the numbers work not to prove you should try and treat them as one dwelling. A crystal ball would help. The more often that the property will not be producing income the greater the advantage of having it treated as one dwelling.
From the day to day rental point of view all the normal rental property deductions apply though some will need to be apportioned between the house and Granny flat, this is usually done on a floor area pro rata basis. If you are renting to relatives or friends and not charging market rent you will not be entitled to negatively gear the property.
The ideal situation would be borrowing 100% for the dwelling you are going to rent out using all your savings to buy your house, minimizing the borrowings for it. This is difficult to do when the property is all on one title. Nevertheless, it is worth setting up two separate loans. You will need a valuer to apportion the purchase price. Once you have got over the rush to settle you should consider applying to the ATO for a ruling on whether the loan for the portion of the purchase price that represents the value of the Granny flat is tax deductible. In the ruling you should refer to Carberry’s case 88 ATC 5005 and IT 2661.
In Carberry’s case the taxpayers were allowed to apply their deposit only to their part of the property. Mr and Mrs Carberry were allowed a deduction for the full amount of interest on a loan used to purchase a combined dwelling/child-minding business, where it was shown that the whole of the loan related to the purchase of the business and the dwelling was purchased with the proceeds from the sale of their previous home.
The ATO’s ruling IT 2661 refers to the case as follows:
11. The approach adopted by the Federal Court is accepted in the special circumstances of the case. Essentially, the issue involved was whether it is possible, when a single asset is purchased using borrowings and there is a dual business and non-business purpose in the acquisition, to apply the whole of the borrowings to the business purpose and to allow a deduction for the interest paid on the whole of the borrowings.
12. In certain cases, such as Carberry, a single asset (such as land with a single title) may be capable of being properly regarded as having been notionally divided between a part acquired with a business purpose and a part acquired with a non-business purpose. In such a case, borrowings may be properly regarded as relating to the notional part of the asset acquired for a business purpose and a deduction will be allowed for the full amount of interest paid in respect of the borrowings.
13. However, for this method of apportionment to apply, it must be shown that the borrowings in fact relate solely to the notional part of the asset acquired for business purposes. In Carberry, for instance, the taxpayers were able to show that the part of the asset purchased for private purposes was paid for with the monies which the taxpayers had received from the sale of their previous residence. Accordingly, it was open to the Tribunal to
find that part of the asset purchased for business purposes was in fact purchased with the borrowed funds.
Sorry for the delay in responding to your question, I have been travelling and had a lot of trouble with my laptops and internet connection.
