Renovations/improvements to a PPR which was previously an IP

Our current PPR was an IP from date of purchase (2003) until Nov 07 when we moved into it. the property is held 100% in my name.

I believe I will be up for CGT on capital gains from date of purchase to Nov 07 (unfortunately I did not live in it at any time prior to Nov 07).

We are about to spend considerable $ on landscaping/upgrades and I want to avoid having these capital improvements increasing my CGT bill.

Am I correct that a valuation effective Nov 07 can be used as the "disposal cost" for CGT purposes, but that this tax will not be payable until I actually dispose of the property? Is a real estate agent valuation suitable for this purpose or does it require a professional valuer?

Any suggestions/advice appreciated.

 

Are you confusing this with the situation where a PPOR is first available for income producing activities ? There would be a deemed acquisition at market value.

In your case, the renovations add to cost base.

If these add tremendous value reflected in a higher sale price, then the Taxman gets to share in some of the gains.

Cheers,

Rob

 

Hi Rob

Yes - this is a PPOR which was initially used for income producing purposes - ie an IP.

The deemed aquisition at market value is the area I am trying to understand.

If property was purchasesd in 2003 for $600k. Depreciation from 2003 - Nov 2007 amounts to say $50k. So cost base is $550k.

In Nov 2007, we move in and it ceases to be income producing property. If market price for property is then $800k, CG is $250k so CGT on this (with 50% relief having held it for more than 12 montsh) would be around $60k tax owing right?

If the above is correct, my questions are: 1) by what mechanism do I assess a defendable market value? 2) When does the $60k become payable - when I sell the property? 3) Since the deemed disposal date for the IP is Nov 07, does this mean any capital improvements I make after this date will not effect my CGT owing?

thanks in advance

 

There is no market value deeming in your case.

There will be no exemption pro rata for those 4 years as a percentage of the total years owned.

Just add improvents to the cost base.

Cheers,

Rob

 

Rob

Its hard enough keeping track of capital improvement spends on an IP, doing the same thing for a PPOR for the next 10 years does not fill me with glee!

So are you saying that if I sell the property in another 10 years time for say $1.5M, then the cost base is the $550k I mentioned before plus any capital improvements since (lets say 100k), so the cost base is then $650k and the capital gain is $850k?

Are you also saying this gain cannot be prorated for the 4 years and I will in effect be up for CGT on the full $850K

If so, this seems a bit unreasonable given most of the period the property is not for income producing purposes. Is this interpretation/treatment covered by the ATO somewhere or is it just your thoughts?

thanks and regards

 

If you own your home for x years.

Initially an IP for 4 years.

ATO wants 4/x of your capital gain.

Take off the original cost base any building allowances claimed (clawed back by ATO).

Add costs of capital improvements and non-deductible holding costs (e.g. interest & maintenance whilst a PPOR).

So if your improvements add significantly to your sale price then the Taxman gets a 4/x share of those profits.

So you will need records of every cent spent on the house throughout ownership and keep for at least 5 years after you lodge your tax return for the year of disposal.

Hope you have a large filing cabinet.
Cheers,

Rob

 

rob
thanks for the follow up response. I really do not want to be keeping receipts on every cent spent on the house for the next 10 years!! What a nightmare.

The other part of my question in my last post is whether the treatment you describe is mandated under ATO rules or is it your interpretation on how they would view it? (yes I'm getting desperate now!)

The other option I was thinking about to avoid the receipts nightmare is to crystalise the CG now by transferring the house to my wife 100%. It is currently 100% in my name, and I understand property can be transferred to a spouse without triggering stamp duty, but will still attract CGT.

As I was an Aust tax non resident living O/S for the 07/08 tax year, my Aust taxable income for that year is zero to negative, so I am thinking perhaps a transfer of the property to my wife in Nov 07 (haven't yet done my 07/08 return) - at least the CGT payable would be at a modest marginal tax rate???

thx

 

Everything is an interpretation.

Perhaps a Full High Court judgement is more persuasive, especially if later used with approval, but for now here is the Commissioner's interpretation in TD 92/134.

As regards the transfer, the following needs to be considered:

1) The capital gains tax event occurs this year when you sign the contract etc.

2) If you have been lodging tax returns as a non-resident, you will be taxed at 29% on the first dollar and also the ATO will inform your country of residence of your income.

3) A change of residency is a CGT event for many of your CGT assets which are not "Taxable Australian Property". Similar rules operate in the other countries.

4) Disposal to a related party could be a "wash sale", TR 2008/1

5) Whether overall this forms a scheme to avoid tax for Part IVA.

There is enough here for an Advisor to gouge a few thousand dollars in fees from you if you wish.


Cheers,

Rob

 

Rob
all very clear - thank you.

One final question - holding costs - you said it includes maintenance and interest costs whilst PPOR, does it also include land rates, insurance, etc?

 

s.110-25(4) for property acquired after 20/8/91

Includes insurance (home - not contents !!) & rates.

Rob

 

thanks Rob