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CGT Business related query

Discussion in 'Accounting & Tax' started by Martinez22, 28th Jul, 2015.

  1. Martinez22

    Martinez22 Well-Known Member

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    If you carry out consultancy work once a week as a self employed business , and are including expenses related to the business in the yearly tax return. Do you pay any capital gains tax if you decide to sell your residential property at some later stage?

    Electricity - $1,364
    Gas - $820
    Water rates - $1651
    Council rates - $1917

    What happens in the scenario if you were to stop doing the business and stop claiming business expenses related to house. how do you determine the amount of CGT applied at the time of the sale ?
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Being a self employed person doesn't mean its a business. And use of the home by a business doesn't always fail the CGT exemption. Some expenses may be limited or denied altogether by tax law. This can include occupancy expenses of a PPOR. The CGT impacts depend of the manner of the business and how the home is used.

    In the expenses listed you missed the most important one. Loan interest. There is a notional interest test that applies to the CGT issues with a PPOR. The test assumes there is a loan (even if there is not) and there is a need to determine if any of the interest may be deductible. If it is then a CGT issue may likely arise. That same issue applies to other ownership costs and is used for CGT. Occupancy expenses like electricity and gas water etc may be determined differently.

    Its a good example of time to seek personal tax advice.
     
  3. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    People make a huge deal out of this particularly mortgage brokers and why ? I got asked this same question from a client today.

    1. The test Paul talks about is in section 118-190(1) and because the individual is entitled to a deduction for interest (even if they dont have a loan IF they did have a loan they would be entitled to a deduction) then you only get a partial main residence exemption.

    In fact PBR 1012767497727 sums it up nicely

    "
    Section 118-190 of the ITAA 1997 applies to deem a capital gain or capital loss to have accrued to the extent to which the sole or principal residence disposed of was also used for the purpose of gaining or producing assessable income during the period of ownership.

    In determining whether a main residence has been used for producing assessable income, section 118-190(1)(c) of the ITAA 1997 relies on a "notional interest deductibility" test, namely that if the taxpayer had borrowed money to acquire the dwelling (or an ownership interest in it), the interest on the borrowed funds would have been deductible.

    If you set aside and use part of the dwelling exclusively as a place of business, you cannot get a CGT exemption for that part of the dwelling by not claiming a deduction for the interest. Nor can you include interest in the cost base if you are entitled to a deduction but do not claim it.

    The amount of the partial gain or loss attributable to income producing use will be calculated under section 118-190(2) ITAA 1997 by reference to what is "reasonable" in terms of the extent to which the taxpayer would have been able to claim a deduction for this interest.

    For example, if 10% of a taxpayer's dwelling is used as a place of business and the taxpayer would have been able to claim 10% of the interest on borrowed funds as a deduction, 10% of the capital gain is subject to CGT."

    BUT SO WHAT

    No-one has discussed two things

    1. third element costs which are added to the cost base. These third element costs might wipe out any CGT in the first instance.

    2. SMALL BUSINESS CGT CONCESSIONS. You can apply the small business concessions to an 'active asset' and the house would qualify EVEN if not used 100% for business purposes.

    So 1. 50% general CGT discount, 2. 50% active asset concession 3. retirement concession or replacement asset rollover.

    CGT in most of these instancs are wiped out with third element and CGT concessions. People are making a mountain out of a mole hill. Chicken little the sky is falling.
     
    Last edited: 28th Jul, 2015
    Daniel Taborsky and Terry_w like this.
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yes always worth reminding about those. But often they panic cause the work from home a few days a week and these is no issue anyway.
     
  5. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    Yes IT 2673 makes it clear that s 118-190(1) does not apply where you have a 'home office' as opposed to a dedicated area used as a place of business. in those cases the main residence exemption applies.