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@PFI

    [email protected] Tax Accounting + SMSF 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@PFI

    [email protected] Tax Accounting + SMSF 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)
     
    Terry_w likes this.
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus 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.
     
  5. Paul@PFI

    [email protected] Tax Accounting + SMSF 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
     
    Terry_w likes this.