Granny Flat- Apportion by size or value

Hi all,

I have recently purchased a property that will be my ppor that has a granny flat on property that I will be renting out. What I want to know is can I claim granny flat costs based on value of granny flat as a % of total property value or as a % of construction size.

A. Granny flat has been valued at $120k total purchase price $620k so 19.3% as total value

B. Granny flat 58 sq metres ppor house 184 sq metre so 31.5% as % of size

 

The requirement is to work it out on a reasonable basis.

Does B take into account the land?

What costs are you proposing to claim?

 

I think a reasonable split would be by value
1: land split between the front and rear by m2.

2: buildings valued by $$

Or get a value of each from a real estate agent or valuer ...
Question to the agent or valuer ..if these two properties could be sold separately ..what would be the value ?

 

agree with terry what are you seeking to claim ? a portion of council rates ? percentage area would probably be more reasonable.

capital works ? would require a depreciation schedule

 

Does the council permit nonrelated parties to lease granny flats?

 

The issue of council permissions doesnt impact tax. The ATO adopt the view that tax applies to all income events even if the source and nature is prohibited by law or criminal law.

 

Thanks everyone for your replies from comments it appears a ‘grey area’. I am planning to claim mortgage interest costs on 120k valuation, rates, insurance etc everything that I can claim on ip. Depreciation schedule on granny flat has been booked in. It’s just what method I use to calculate these and whether either method is acceptable if I can justify it. Apportioning land is difficult for things like a shared driveway the block is 5000 sq metres and yes granny flat is council approved and can be leased out.

 

The loan will need to be apportioned, you can't split it and have 2 separate split one relating to each asset as when you purchased you purchased the whole block

 

going to have to do a loan apportionment schedule every year. going to get quite messy i suspect.

 

Basis for apportioning ?? I would consider a valuer needs to advise the portion of the original cost that relates to the GF land area and the apply that % to the present house and land loan. Then any borrowing for the GF. And apportioned for the present year between the non-deductible period up to the date the property was available for rent. The law changes before parliament stop claiming interest until the occ cert or the date available for rent whichever is later.

If the loan is blended it will also be a mess on top of the apportioning on a reasonable basis. Only a valuer could really likely split the original cost into its elements. Extra cost for that.

Insurance is probably easier to apportion as most insurers will show the two insured values for the two dwellings. And for the time periods involved as well. A LL policy would be 100% of course.

 

Just to clarify this - say I purchase a block of land for $500k with one loan of $400k, then develop two identical townhouses on equal land, then subdivide the two lots. Say I live in one and rent one. Are you saying I can't then split the loan into two $200k loans to separate the deductible and non-deductible debt?

Or is the difference that the land hasn't been subdivided?

 

Nope I am not saying that.

say you buy one property which has 2 buildings on it. You generally cannot split the loan so they relate to each building.

See Cranberry’s case, Federal Commissioner of Taxation v. Carberry, Federal Court of Australia, 14 November 1988 ATC 5005 CCH iKnow | Australian Tax & Accounting

Taxation Ruling No. IT 2661 Income tax: apportionment of interest where money is borrowed to fund the purchase of an asset part of which is used for a business purpose and part for a non-business purpose. Legal Database or Legal Database

 

Ok, thanks Terry.

 

Hi Guys,
It seems i am in the same situation. Last november (2018) we (me and wife) bought a new home (PPOR) which has an attached 1 BR Granny flat (IP) in North west sydney.
The money we paid to buy the whole house was $915K and we did not know any split of the cost between home and GF so we just took a single loan and are paying Interest + Principle on it.

The GF was put on rent from Jan 2019, now i want to
understand how to apportion the Rates, interest portion for GF part etc. Landlord insurance is separate already however the complete home insurance includes the GF part as it comes under same roof.

The depreciation schedule of GF shows the construction cost of GF as 115K.

We do not have any document which can tell how much area is coming under GF, unless i start measuring it myself. GF has it own backyard and a separate entry.
What is the best way to handle this so that i can apportion stuff for tax purposes?

 

Get out your measuring tap!

You will need to apportion the costs based on a reasonable basis. I think a valuer might be better than measuring on your own.

 

Given that there will be two portion you need a quantity surveyor AND a reg valuer

1. QS can assess the Div 43 value of the GF element and its surrounding structures and works
2. Valuer can apportion the purchase into two elements but you need three items of information

A. The house and its element of the land etc as a specific % of the original cost
B. The GF and the area of land specific to the GF as a % of the total area and
(A + B = 100%)
C. The portion of the original price (incl legals, duty etc) paid that relates to the GF land and the GF. eg will assist to apportion rates, interest etc (The resulting difference is the historical costbase for the home)

Merely measuring area is not reasonable.​

 

Thanks for your reply Terry and Paul.

This is really valuable information, so now i know that i need to go to a "Valuer". Can i go to any valuer or could you refer a good chap who can do this for me?

2 follow up questions coming in my head after reading your response:

As the Quantity Surveyor already mentioned in his report that granny flat cost as 115K would this just be the construction cost?

We bought the home when build was already complete, so we only know full cost of home and do not know the land value, can i hope that Mr Valuer will find price of all the components such as Land (House + GF) and Construction (House + GF) for this purpose.

 

that is what you want to engage the valuer for - apportion the values between the 4 and then you can work out what percentage of things to claim.

 

Market valuation for tax purposes

 

This text from the ATO website is helpful in understanding the ’reasonable basis’ for splitting the granny flat. They are suggesting determine the ‘floor area’ of the IP part of building and use that as basis of for the split.

https://www.ato.gov.au/law/view/document?Docid=TXR/TR9725/NAT/ATO/00001&PiT=99991231235958

“****Apportionment - capital works partly used in a deductible way

39. In November 1997, Dr Claude Jones commenced construction of a residence and surgery to cater specifically for his circumstances. He runs a part-time private medical practice three half days a week from his residence. He also works part-time as a consulting physician at the local bush nursing hospital. The part of the new building designed specifically for his medical practice incorporates a waiting room, a storage room and two consulting rooms. The suite of four rooms has a separate entrance, is furnished specially for the practice and is not suitable for residential accommodation for Dr Jones and his family.

40. The building is a single construction expenditure area, only part of which is used for income producing purposes. To the extent that the building is used for residential accommodation, it is taken not to be used for the purpose of producing assessable income (section 43-170). This situation is taken into account in calculating the amount of the deduction under section 43-210. Therefore, the calculation in step 1 of section 43-210 needs to be based on a reduced amount, excluding the area used as a dwelling. Dr Jones has to reduce the amount on which to base his deduction by reference to the floor area of the residence, unless another method is more appropriate.*****”

Does this mean land is not considered in income producing, even if the granny flat has its own separate backyard with private entry?
If this is true- then i may loose some benefit in claiming back the taxes however, in the long run when i sell the property i need to pay less CGT ( as that is only payable on the % of house which is income producing.

Does this make sense to anyone...