House divided into 3 flats, one of which will be PPOR.

Hi, new here and to IP''s. I've searched and trawled through 20 pages and had no luck finding an existing thread for any tips related to the following scenario.

Im looking at a property which is a freestanding house divided into 3 flats, a 2 bed, a 1 bed and a studio, all on the one title.

I'd be borrowing about 40% of the funds and living in the 2 bed part of the property, lets say it's 50% by square meterage. Leasing out the 1 bed and the studio covers the mortgage more or less.

I'm not able to borrow any more than what will be around 40% of the purchase price.
I generally pay little or no tax from my normal income producing activities ( I know how that reads but no, nothing illegal I have no plan for how long I will hold onto this property although its likely to be at least 3 years I guess or if I might live elsewhere at some point in the future while renting it all out. I'm mid life, single and self employed so flexibility is something I do have plenty of.

I hope thats enough information, what might be some tax effective ways I can structure this? I'm guessing its best to somehow apportion the loan so its applicable to the income producing part of the property and the cash has "paid" for the part I'll reside in. I'm also guessing that CGT will always be applicable to whatever part of the property I dont live in unless perhaps I dont rent any of it out for a period making it entirely my PPOR. I'll be enaging the services of someone for advice but I'm here hopefully learn about what sort of questions need to be asked.

Any tips would be greatly appreciated.

 

The tax treatment would mean an assessment of the property to determine the deductible v's the non-deductible % for ownership and operating costs. Likely based on square meters with allowance for common area use eg laundry ? yard ? garage ? The two may be different %. CGT would also apply in a similar fashion as only the private % would be exempt. If you choose to move out then the absence rule may enable the exemption to continue on the % that was formerly your home.

A common question I have encountered where a bank may limit its lending due to the nature of the boarding is this - The bank will only lend me 40% as thats the income producing portion etc. So can I claim all the interest against the rent ? No. The interest must be apportioned using a reasonable basis along with all ownershp costs. Remember the borrowed money buys the whole title and not just a portion of it. So it must be apportioned. You cannot attribute the borrowing or likely any costs other than tenant specific costs (eg LL insurance ?) to a specific portion of the property.

Having three different areas may limit you accessing the full main residence exemption later if you are not able to occupy and use each of the other areas (ie if they are walled off ?). Mere vacancy of those other areas isnt enough. You must use and occupy those areas also if that occurs. The main residence exemption doesn't automatically always apply to a full title if the title consists of separate portions. A good example is a duplex where a possible 50% exemption may exist. This works both ways. The exemption can also extend to a second land title eg tennis court and pool if its accessable and adjacent to the main home on a separate title.

Have you checked with council and insurer on their views for this property ?

 

If you don't have council consent ie DA, inappropriately zoned for flats, haven’t provided fire separation etc then the tenancies may be terminated by council without reference to the Tenancies Act or recourse.

 

Not much you can do other than apportion the expenses.

This probably won't apply in your siutation but


See Cranberry’s case

Federal Commissioner of Taxation v. Carberry, Federal Court of Australia, 14 November 1988 ATC 5005

Australian Tax & Accounting | CCH iKnow

 

Carberry applies to business and private use and a "notional apportionment" of interest between two different purposes in a manner that is not reflective of the title but a specific use of a element of the title (ie the business use alone). Many individual taxpayers have attempted to raise the Carberry decision unsuccessfully when acquiring property.

I consider Carberry has possible application to a taxpayer buying a duplex for example. The taxpayers say have equity of $400,000 and seek to borrow a further $400K to fund the total $800K purchase price. They seek to treat the $400K loan as being to acquire the investment and the cash used to acquire the PPOR portion. Any taxpayer would need to seek a private binding ruling. And that may not be as likely to be issued as one may think.

Tax Ruling IT 2661 contains some guidance on the Carberry decision incl :

13. However, for this method of apportionment to apply, it must be shown that the borrowings in fact relate solely to the notional part of the asset acquired for business purposes. In Carberry, for instance, the taxpayers were able to show that the part of the asset purchased for private purposes was paid for with the monies which the taxpayers had received from the sale of their previous residence. Accordingly, it was open to the Tribunal to find that part of the asset purchased for business purposes was in fact purchased with the borrowed funds.

14. Not all assets can be notionally divided into parts such that one purpose may be ascribed to one part and a different purpose to another part. For instance, most motor vehicles and machinery will be incapable of being notionally divided such that different purposes may be imputed to particular parts of the asset. A dual purpose may attend the borrowing of monies to purchase such an asset but the dual purpose is not divided between specific parts of the asset. In such a case, the principles of apportionment will apply to allow a deduction for the interest on the borrowings to the extent to which the asset is used for an income-producing or business purpose.

A single title that is not divisible poses a concern but not a total impedement to this view. Any taxpayer would need to seek a private binding ruling and also be capable of clearly demonstrating application of their own monies to a specific portion for use. Given the uncertain nature of the OP question regarding occupancy of a private portion that may be difficult. However lets assume a mixed use property that contains a house with two adjoining flats then there may be potential to apply for a ruling. But I earlier said that may not be given. ...Read on....

The ATO doesnt accept Carberry as a rule for non-business application. This is evident in TR 2000/2 para 51 which raises a doubt about the less than strict approach taken by the appeal tribunal in determining the Carberry decision.... the Tribunal did not apply a strict tracing approach to the borrowed funds. However, as recognised by Davies J in that case on appeal to the Federal Court, an apportionment of interest would have been required if the Tribunal had found as a matter of fact that the borrowed funds had been applied to both income producing and private purposes.

 

Yes, I'll certainly be making enquiries with the council.
What I'm unclear about is can such an order be made on a property like this that has been in this 3 flat configuration since at least the 1950's of not earlier.

The council currently charges for 3 sets of waste and recycling bins for this property but I don't think thats enough to draw any conclusions.

 

So ignoring CGT for a moment, even if it cost me a little more than the income on the 50% of the property I would have occupied the potentially it may be better not living in this place at all? Interest in the first year would be around $18k.

Can I live in this property in a single occupancy mode at any time in the 6 year period to make it my PPOE?
The property would be very easy to revert to a single occupancy and then back again for a future owner.

 

Interesting, the cash portion of the funds in my case is very clearly tracable to the sale of my previous house.

 

Thank you all, very enlightening already.

 

Yes, but this doesn't mean it would be exempt from CGT.

 

It will never be 100% exempt it seems

 

Because it's primarily going to be multiple occupancy dwelling?

Can anyone point me to a good CGT primer for this sort of scenario?

 

Most unis offer a basic accounting degree but then allow 5 to 20 years of experience plus some post grad so you can really get tax qualified.

Ever tried to do your own dental work?

 

Actually it's clear I need to read up on the basics before I bother you good people with specifics at this stage.

I will google some reading for the weekend.

 

Yes, I will be seeking the help of a professional but I'd like to have a reasonable understanding of what sort of questions to ask. If it's not an appropriate forum for this then I apologise.