Tax Tip 93: Subdividing Property and Deductibility of Interest

Discussion in 'Accounting & Tax' started by Terry_w, 20th Dec, 2015.

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  1. Chadwick

    Chadwick Active Member

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    Hi guys, me again :eek:)
    I've had a consultation with my accountant regarding my situation outlined above and whilst they agree with most of your expert responses, they have advised me that I must refinance the existing loan into two loans - simply splitting the existing loan is not sufficient.

    They have quoted TR 2000/2 https://www.ato.gov.au/law/view/view.htm?docid=TXR/TR20002/NAT/ATO/00001 at paragraph 18:
    18. A taxpayer may choose to refinance a debt outstanding on a mixed purpose sub-account by borrowing an equivalent amount under two separate accounts or sub-accounts. If the sums borrowed under those two separate accounts are equivalent to the respective income producing and non-income producing parts of the existing outstanding debt, we accept that interest accrued on the debt incurred in refinancing the income producing portion of the mixed purpose debt will be deductible.

    Is this open to interpretation? Both Terry and Paul indicated that splitting the existing loan is OK or have I misunderstood you? This is a sticking point at the moment because lenders won't allow me to refinance due to more stringent servicing requirements but will allow me to split the existing loan.

    Thanks for your input.
     
  2. Terry_w

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

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    splitting results in 2 loans so it is a refinance.
     
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  3. Paul@PAS

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

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    I'm with Terry. Para 18... Two seperate accounts or sub accounts. Binding private ruling you can do yourself.. Not sure why the tax adviser is confused
     
  4. urbanista

    urbanista Member

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    I am actually wondering about the same question. My apologies if it was already answered, I could not find the straight answer on this thread.

    When subdividing PPOR and building two new houses, PPOR plus rental property, can one pay cash for PPOR building costs and borrow 100% for rental? Would then the loan become 100% deductible?
     
  5. Terry_w

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

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    You would need 2 separate contracts. Best strategy is to borrow 100% for everything, split the loan and then pay off the main residence portion.
     
  6. urbanista

    urbanista Member

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    Can I have one construction contract but separate construction invoices per each property?

    Unfortunately, we cannot service 100% loan. The bank will lend 65% of the end value only.
     
  7. Terry_w

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

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    1. You can, but how can you show you borrowed to pay the investment debt?

    2. Any other sources of finance? Doesn't need to be secured against this property.
     
  8. urbanista

    urbanista Member

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    1. We took an OO IO home loan when purchased the site, and put cash in offset to finance the construction. The loan is split, so the idea is to pay down some of the splits then re-draw and use the funds to pay 100% construction costs on rental property. These splits will then be 100% deductible since the money are now used to construct rental property. The remaining splits will be apportioned between PPOR and rental so only about 50% of them will be tax deductible.

    Wondering if the logic is correct from ATO perspective. Still not sure how the builder would be able to split the costs and issue separate invoices per each house.

    2. We were going to use cash in offset to pay the builder. Borrowing more is difficult due to servicing capacity.
     
  9. Terry_w

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

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    sounds messy
     
  10. Paul@PAS

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

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    If the property is newly constructed there may be limitations on deductibility prior to actual completion and availability in any event. It certainly sounds messsy and potentially could even be tainted. Personal tax advice would be wise. Done badly it could impact all future deductions for interest. I also cannot see how you can apply borrowings to a portio of a invoice which conincidentally is the deductible portion. Like a belnded loan you may have a blended construction cost.
     
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  11. Sheshop

    Sheshop Well-Known Member

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    Im subdividing my PPOR into 4 lots (the existing PPOR on 1 lot and 3 vacant lost to sell as land only). Do I get a valuation for the property now before I split so that the taxable profit is calculated based on today's value rather than what I paid for the PPOR 3 years ago?
     
  12. Terry_w

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

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    You will need to apportion the costs on a reasonable basis. Its not really relevant what you paid fo the property.
     
  13. Paul@PAS

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

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    Given that the 4 lots are not homogenous it may require a valuer assist to determine how to apportion the total CGT costbase for the former home into :
    A : The resulting main residence portion; and
    B The three lots of land. The total of A + B must equal the total costbase. It may assist that each of the 3 lots in B is also split out as they may sell at different times and affect calculations individually, but not overall.
    Generally speaking a taxpayer would lack the objective basis and knowledge to value the historical costbase apportionment for either A or B. Costs incurred todate in the venture may add to the costbase of B, not A.

    The valuation to apportion may also impact use of the margin scheme for the sale of land (B) subject to GST and be of further use as the cost of the land for B1, B2 and B3 may each need to be known.. There appears an enterprise to dispose of the land as a profit making intention (even if isolated to a single event or lot) rather than a mere realisation which may apply to general disposal of the whole site. As a enterprise is evident then the sale of land is a taxable supply for puposes of GST Law. GST may be 1/11th of the contact value or may be reduced if the margin scheme is used. The margin scheme will consider the "margin" using the cost of the land allocated. GST on costs to subdivide and sell may be creditable. The ex-GST determined profit would be taxed as ordinary income.

    For the land sales the fact that the land was once a element of a main residence is not relevant. The resulting termination of the main residence exemption is retrospective as if the three lots had never been a element of the former home.

    Selling the home and approved plans for subdivision may change the above outcomes eg Potentially all subject to CGT subject to the 2Ha rule and exempt and no GST. While less profit may be expected, the tax savings may be self evident. It may be worthwhile to cost both options.
     

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    Last edited: 17th Jul, 2020
  14. Sheshop

    Sheshop Well-Known Member

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    Wow, you sound very intelligent. I will need to read this a couple times to soak in. The zoning of the property is changing soon which will allow higher density (double what it is now, so 8 lots instead of 4) so I am Considering selling The entire property to a developer. If I did that I wouldn’t pay CGT would I?
     

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