NSW Tax Issues PPOR owner living in Granny Flat

Discussion in 'Accounting & Tax' started by filipe, 15th May, 2020.

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  1. filipe

    filipe Well-Known Member

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    I can't get my head around this.

    I own a 3 bedroom freestanding house in NSW.

    I am planning to put a GF on the back, and me as the sole owner, move into the small GF and rent the main house out.

    I will ideally rent it out room by room, as then I can do it directly without agent, without splitting the power and utilities. If this is not good for tax treatment, I can find someone to act as a "head tenant" where they are my point of contact and maybe I give them a lower rent and they manage renting the other two rooms out or something. I can either keep access to the main property (e.g. to use the laundry) or keep well away from it (depending which way makes the tax laws work better).

    What tax do I need to be aware of?

    1. Income tax (I can use negative gearing calculator to see the impact)
    2. CGT tax (main house is 70% of the block, GF is 30%, I assume some calculation will apply on sale)
    3. Land tax

    Amy I missing anything?

    I am hoping land tax main residence exemption still applies?
    NSW legislation Schedule 1A Land Tax Management Act 1956, does my situation fall under any of these definitions? 2 rooms? A flat? even though it's a house, is it a "flat" according to this definition? If I rent it out to multiple people separately? Or even all together?


    "flat" means a room or a suite of rooms (whether or not forming part of a building or a detached building):(a) used or occupied as a separate dwelling, or(b) so constructed, designed or adapted as to be capable of being used or occupied as a separate dwelling.

    If it is land tax exempt, I'll save $5k a year. May be wishful thinking....anything else to be aware of?

    When I first bought, this house was an IP, I now live in the house, when the GF is built, I will move out of the main house and into the smaller GF. I plan on fencing separate yards etc, but am flexible on everything to make it more financially appealing.

    Thanks!
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    For Land tax it may be exempt provided you dont let the house with more than two leases or two occupant groups at ANY time and you or any one owner occupy and use the land eg the GF at all times as explained in Caluse 2 (6 month rule). Local council may limit and prevent more than one lease through modifications to premises. Hence a single lease should pose no problem. Letting rooms will pose a concern.

    The principal place of residence exemption

    Clause 2 and 4 are most appropriate. I recall a private ruling by the Commissioner issued to a taxpayer who leased the home to his wife who sublet each room to 4 occupants. The Commissioner conisdered that was NOT exempt and looked through the lease even if it was an arms length lease. (ie the term tenancies or lettings....You can have one lease with that lease having three tenancies). This may not impact a house share but if badly done it can.
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    • Separate meters for elec and water ? (not a sub meter). Otherwise the house may get it all free.
    • Internet?
    • Bins and waste charges
    • Insurance incl LL
    • Tax advice re % split and allocations for CGT etc later. The GF % of land may be exempt but the other ouse portion wont. I generally recommend a valuer apportion the costbase into each element aftre getting tax advice. While you think its 70/30 that may be the land...The 70% also has a house on it. The 30% only has GF on it. Some parts may be mixed use or dedicated. Thats why a valuer is often needed.
    • CGT records for the dates and many other isssues
    • Loan splits for the GF and other portion. (May need to be based on valuer)
     
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Might you be better off living elsewhere and renting the whole thing out? Potentially using the 6 year rule to avoid CGT.
     
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  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Sometimes a GF can be positive geared making it unappealing for tax purposes (as there can be few costs as deductions beyond say 20% of interst and 15% of rates etc and some toke depreciation) and occupancy makes sense while -ve gearing the house but if it has little debt etc Terrys view can be spot on since both the house and the GF can pull some decent income to offset the full debt. I would be having a chat with a local PM about the rent alternatives for one or even both and then consider some options.Scratch out the numbers before tax and compare that to the rent etc... And factor in tax free growth over at least 6 years. You could move back to the GF for a few months before then and change your mind and rekick another 6 years :)

    1. Live in GF
    2. Live in main house
    3. Live somewhere else and rent GF and house
    4. Live somewhere else and rent house only
     
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  6. Gandapur

    Gandapur Member

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    Hi Terry, I am in a similar situation and a bit confused in regards to CGT, your last comment caught my attention hence my questions, hope you can help answer below although this thread is 8 years old.

    We purchased our PPOR (NSW) in 2020 for $620K (We are still living in this property). We have done some major renovations to this property in 2022. We are now planning to build a GF and plan to rent it as well as our PPOR, we will rent somewhere else. My questions are:

    1. If we rent both PPOR and GF, can we benefit from 6 years rule to get CGT exemption? If yes, do both PPOR and GF need to be rented at the same time to be eligible for CGT exemption?
    2. Before the end of 6th year, do we have to occupy both PPOR and GF to be eligible for CGT exemption?
    3. If we move out of PPOR into a rental place sometime after (say 2 years after) GF is rented, would we only pay CGT for the 2 years for the GF portion of the land use?

    Thank you.
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    1. Sometimes ONLY the home portion can be counted as an absence. If the GF portion is income producing prior to the absence it cant be counted as the GF inst then a part of the main residence so it cant use the absence rule If it is not rented prior to absence and is used as part of the home until the absence then it may also be exempt. You would need records to support that. GFs do create some apportioning issues too. While the land is one asset in reality think of a house + GF as each being a portion of land + the seperate dwelling part. ie two CGT assets.
    2. The 6 years is from the date you depart providing the absence is unbroken. If it was 7 years then 1/7th of the gain between the market value when you depart and its sale would be taxed. 6 years max is exempt. You could move back in at 5.8 years and stay 6 months then leave and repeat. But the GF issue may or may not enjoy that same position.
    3. No although you havent explained this well as you understanding seems incorrect. If you move out you are absent. If you dont then reside in a property you (or spouse) own then you are absent and the CGT main residence may continue. If you move into a property one of you owns you cant use the absence unless YOU ALL make choices. While absent the former home is considered your home even if it produces income.

    One common mistake many make is assumiing a GF and a house ant be used as one dwelling. They certainly can. A main residence can even use two houses on different sides of a road or down the road in some cases. Its how each of the dwellings are BOTH used that is important.

    Of course land tax remains a issue.

    Seek personal tax advice.
     
    Last edited: 17th Apr, 2023
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I assume you mean 'main residence' instead of 'PPOR' since we are talking about tax.

    1. Potentially yes. No
    2. No
    3, No

    you should seek specific tax advice as your questions don't address the relevant issues