Converting an IP to PPOR - CGT & Land Tax

I purchased a property 9 months ago, did a basic cosmetic reno and rented it straight out (did not live in it myself).

This is the one and only property I own. I live in NSW.

I signed a 12 mth lease with the tenant. At the end of this 12 mths I plan to move in and make this my PPOR.

Is it necessary to get a valuation done after the tenant vacates, when this property becomes my PPOR, so that if the market has not moved (it hasn't) since the purchase price, if I later sell many years down the track the 12mths it was rented then has nil effect on capital gains and I won't pay any CGT?

Or does this make no difference and if for example it was a rental 1/10th of the time I owned it, then I pay 1/10th of the CGT regardless of the fact that the window of time that the property was rented it didn't increase in value?

On another note, I have never rec'd a land tax bill, possibly because I settled in Feb 2018 and the land tax year is assessed as at 31 Dec in NSW. Should I be worried I will receive a land tax bill 31 Dec this year? Will it be triggered from my tax return submission (not yet done).

'Your notice of assessment covers a calendar year, 1 January to 31 December, and includes all property you own at midnight on 31 December of the year prior to each tax year.' - Does this prorate, e.g. if the tenant vacates 5 weeks into the calendar year; is there any ability to pay partial land tax, or do I have to pay for the full year? It calculates to be $10,000 I am not eligible for any concessions.

 

No valuation needed.
Land tax not prorated

 

Btw u need to be living in property from 1 July t get the land tax exemption nxt 31 Dec.
A trap for young players

 

Why is that? Will I be required to pay CGT on a % of time ownership even though property value didn't move during the period it produced an income?

I wonder if there is a chance OSR doesn't realise I am required to pay land tax and forget to bill me. The dumb thing is that the tenant vacates only a few weeks into the taxable year, if they moved out before 31 Dec 2018, would that mean for calendar year 2019 I pay no land tax?

So essentially I pay $10k land tax because the lease ends Feb and not 31 Dec 2018? In which case I should say to the tenant I will give them $4k if they move out early (31/12/18) and I am still 'up' $6k by not being required to pay landtax?

 

1. It's the law. S 118-185 I think.

2. No. Would be liable in full on 31 dec

 

Prorated

Consider third element costs

 

Regarding Land Tax: according to the OSR website:

Note: If the property is not occupied until after 1 July, the Chief Commissioner may grant an exemption if satisfied that the property was used and occupied as your principal place of residence on the taxing date.

We faced the same situation a few years ago when returning to our PPOR. I clarified our situation with OSR prior to the move and it was really the case - if the tenants vacated just before Christmas and we moved in by 31st December then no land tax was payable. Had all the services connected in our names plus kept a lot of evidence eg receipts from local shops for the few days before/after, phone statements showing calls being made from the house etc., even photos of our new years eve party at home just in case there was any query afterwards about having actually moved in.

Note that you should have registered for Land Tax on the OSR website when first rented out, you need to then update your registration when you move back in.

It would be much fairer if Land Tax was pro-rated according to days-not-occupied/365 rather than having a trigger date of 31st December. Having a lease end early in the new year is not good if you plan on moving back from a NSW Land Tax point of view.

Hope you can do a deal with your tenant to move the date!

 

The commissioner has the discretion to treat the property as exempt if you do move in after July under Schedule 1A, clause 2(2)(b).

 

Hi Terry,
I plan on doing a knock down of an existing IP and rebuild a PPOR. Does the same concept apply to land tax if the tenants move before 1 July and the new build has already begun before 1 July?

 

Nope, different concepts for vacant land. check out schedule 1A

 

Issue - Unregistered for land tax ?? Any exemption must be applied for. Only the actual main residence is a factual exemption that need not be applied for but you havent met that.

 

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Why is that fairer. The PPOR exemptions have worked quite well for decades.

 

Consider this simple example:
PPOR is currently rented, tenants will move out and the owners move back in at the end of this year.
Family A: Tenants move out and owners move in on 30th December 2018. No land tax payable for 2018 due to exemption.
Family B: Tenants move out and owners move in on 2nd January 2019. Full land tax for 2018 is payable.
So A is better off than B by the full annual land tax amount, even though there is only 3 days difference in the move in date. NSW land tax can be significant - in our case roughly $26000 p.a.
A pro-rata system would work like this:
Family A: 2018 Land Tax = 364/365 * $26000 = $25929
Family B: 2018 Land Tax $26000 + 2019 Land Tax 2/365 * $26000 = $26142

 

This is why the Commissioner has discretion.

 

You arent looking at the full picture. Family B could be exempt too.

 

Thanks for the input.
So when I first bought the property and rented it out, was I supposed to manually register with OSR to tell them I am renting it out and would be liable to pay land tax?

31 Dec 2017- property was not owned by me.
31 Dec 2018 - property owned by me, rented out, tenant has 5 weeks to go.
Feb 2019 - I move in.

Given I did not register and tell them it is an IP, is there a chance they won't bill me and forget. And I can lay low under the radar and hope they never notice?

Of course I will be lodging my tax return at which time it may some how cross-check and notice rental income but no land tax bill...

I don't think it will be possible/fair to negotiate with the tenant to get them to leave 5 weeks earlier, I guess it may be... that will make me lose $4500 rent income but also reduce the land tax bill from $8k to $0 if they are vacated 30 Dec and I am moved in 31 Dec 2018. Then given they occupied for "part" of a year and never across 12 mths on the "trigger date" 31 Dec...I will not have been liable for land-tax at all.

Gosh, what a mess.

I also read that if I bought this and didn't move straight in , but within 4 years made it my PPOR - I would have been exempt, but this test only applies if NO income is received (in which case, it was) ...

 

For CGT - does a 6 year exemption only work if you move immediately into the property, live there, and then move out? So in my case, YES CGT is applicable, and only on the % of ownership that the property was used to produce income; i.e. no need for valuation or anything.

 

Avoidance isnt a form of tax compliance. The 2018 period is taxable and yes you are required to register AND apply for any concessions if you consider exemption may be met.

Land tax clearance occurs when you sell and avoidance is generally detected and can be subject to a penalty of the sum avoided + the primary tax. The OSR check non-compliance using a variety of data. Like rental bonds, lease data and other matters.

 

Yes. Unless you occupy as main residence from day one then the CGT basis will be pro-rata. BUT a different method does allow non-deductible ownership costs to inflate the costbase.

 

the 6 year exemption can be used even where the property was rented out first, but the property will still be subject to CGT as the 6 years only applies after you move in.