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Granny flats/second dwellings on PPOR land - tax implications

Discussion in 'Accounting & Tax' started by Sequin, 17th Aug, 2015.

  1. Sequin

    Sequin Member

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    Not sure if this has been discussed?
    Has anyone done it?
    What are the tax implications?
     
  2. York

    York Finance Broker Business Member

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    Can you be more specific? Tax implications on rent earned on granny flat? CG implications when property is sold?
     
  3. Sequin

    Sequin Member

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    Thank you.
    Yes CGT implications when property is sold.
    Also, yes, how to account for rent and apportionment of costs on an annual basis.
    I am also interested in the overall assessment, of whether or not it is a good idea?
     
  4. neK

    neK Well-Known Member

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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    complex question.
     
  6. robboat

    robboat Well-Known Member

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    You (with the help from depreciation schedule/quantity surveyor and accountant) work out the percentage of the property that is devoted to rent income and apply that to costs/deductions.
    For example: Rates are $2000 and the secondary dwelling occupies 50% of the lot, then the investment gets $1000 and the PPOR gets $1000.
    This can vary depending on your situation......

    CGT - same, same situation applies but I believe this will change in the future.

    We have our PPOR with a secondary dwelling and are very happy with the situation. We are looking at a +15 year term here for the kids to grow up. We do not intend to sell but rent the PPOR in the future. Our income will be good but has a CGT liability if we must sell for some reason.

    Get good professional advice as it has long term ramifications.

    Good luck.
     
  7. Vacant

    Vacant Well-Known Member

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    @robboat, how do you find having a secondary dwelling on your PPOR? I assume it's tenanted? My wife and I are seriously considering putting a Granny Flat at the back of our block for some extra cash flow but I'm unsure if I want to share our space. Likewise, don't intend to sell but we'll be here for a fair few years while the kids grow up.
     
  8. propertyhut

    propertyhut Member

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    Hi All,

    here is my scenario.
    purchased prop for 435 k.
    built granny flat for 140k. expensive. demolition and sewer encasement.
    have in rented from October last year...

    if i decide to sell the house after October 2014. say for 850k. how much capital gains tax i will need to pay for granny flat.

    my regular accountant said. i just need to organise a registered valuer, after the sale. to produce a valuation report. of how much was Granny Flat value in the sale price on 850k.

    so if the valuer says granny flat only added 140k to the sale price. i dont pay any tax.

    if they say, granny flat was valued for 200k. i pay 30k capital gains tax.... based on 50% rule.

    does this make sense.

    any accounting or taxation expert out here?

    thanks,
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    You cant actually pay CGT on a GF. Its not a CGT asset and cant be a separate cgt asset as a result. Its a depreciable item (in a simple sense). They issue is less about there being a cap gain on the GF and more about what the exempt asset is for the main res exemption.

    Also how would you sell it separately from the land ?? Even ATO say that cant occur. So the main residence and GF must be seperately dealt with. I have issues with this idea of a valuation. Its possible that there may only be a balancing adjustment to the written down value etc technically leaving a substantial exempt main residence as a consequence. There is a question over whether any of the land needs to be allocated to GF use or not. This may have a CGT effect - on the home. I argue both ways and have no answer to it at this time.

    Its a area of a planned Tax Determination / Ruling request. The ATO haven't kept place with the popularity of GFs. There is a possibility that some of the ownership costs may or even may NOT be deductible against the GF income and this may also affect the GF tax outcomes.
     
  10. propertyhut

    propertyhut Member

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    Paul: Thank you for your response.

    I have already purchased main house/prop in 2012. for 435 k.
    then explained got GF built last year. I have it tenanted and I am self managing. so in a way. not even have a lease. but do have landlord insurance.

    back to CGT. what will be best way to proceed or workout the CGT implication. if selling the house this year.
    i just want to do the right thing and follow the correct process.

    wont lie, my accountant told he has not dealt with a house being sold with GF. but this was his conclusion with dealing CGT.

    just want to make sure that is correct.

    regards
     
  11. propertyhut

    propertyhut Member

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    the main reason for asking. is if I have to pay 20-30k CGT. it makes sense for me to to sell the house. pay the portion of CGT and then buy the new prime residence.

    if for whatever reason... say purchase price 435k. sold price 900k.

    somehow accountant/ATO tell CGT is like 100k or something.... then I am honestly better of not selling it.
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Its no mans land. I want to do a private ruling (first option) but it comes with a taxpayer risk and requires a brave soul to put their hand up. Alternatively a ATO ID may suffice and suit the ATO better for broader application. I have said I will do it for free but alas no brave soul yet and I have no time to scratch myself I have a few issues to raise in the request which all affects outcomes.

    I will admit there is a potential downside and its possible that little to no ownership costs may be deductible v's rental income on the IP.

    One of the key drivers for GFs is the ability to generate great yield. That same issue reflects in tax with very limited deductions. The GF itself is just a depreciable shed and is not a CGT asset. Put into the business context its like suggesting the land under a printing press is a part of the printing press. Does that explain the issue better ?
     
  13. propertyhut

    propertyhut Member

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    Paul,

    wont lie I am still a bit confused...

    but one last question to all.

    say even if we need to pay CGT. which is ok... regarding the 12 month period.

    if the granny flat.. was completed the final payment to builder done on say 10 nov 2014...occupancy certificate came on 20 nov 2014... family friend started reading in december 2014.

    now if i sell the house with granny flat... in october 2015. that is when the buyer pays .025 deposit.

    will I have to pay 100% cgt on granny flat...although its being settled in december 2015??

    the 12 months count from the time.. when the buyer pays .025 or when property is finally settled.??

    thanks,