Owners of residential properties other than their home – whether for investment or lifestyle purposes – can end up paying more capital gains tax (CGT) than they should because they don’t understand how it works, says Mr Peter Bembrick, tax partner at accountants and advisers HLB Mann Judd Sydney.
“While there are a range of CGT obligations with any residential property that is not the prime residence of the owners, there are also a wide range of expenses that can be included in the “cost base” for CGT purposes. These can significantly reduce the CGT liability on sale.
“Tax treatment differs according to whether the property is used to produce income, such as an investment property, or for lifestyle, such as a holiday home.
“With an investment property some costs can be used as an offset against income, whereas with a holiday home, while costs cannot be deducted from owners income, many can be used when calculating the cost base of the property.
“Understanding what can be included in the CGT cost base, and what can be treated as outgoings for an income producing property, can mean a difference of thousands of dollars to taxpayers.
“Just as important is keeping the records to support the expenditure, particularly those used in the cost base calculation, otherwise they may be disallowed.”
Mr Bembrick said owners of holiday homes appear not to realise the importance of keeping records of all expenditure from the moment they are purchased – including legal fees, stamp duty and any other costs relating to the purchase, as well as all expenses occurred in maintaining the property.
“For owners of holiday homes this may mean keeping invoices for many years – and can accumulate to a significant reduction.
“Without proper records and documentation showing what money has been spent on a property, it is almost impossible to justify the full amount permissible when calculating the CGT cost base.
“For rental properties, outgoings such as council and water rates, strata levies, cleaning, gardening, repairs and maintenance, can be deducted from income.
“What is not widely understood is that for holiday homes these expenses, as well as the cost of improvements and expenses associated with buying and selling, can often be added to the cost base for CGT, even though they are not an income tax deduction.”
Mr Bembrick said that the simple formula for calculating CGT is to take the amount realised on sale, less the cost base (including holding costs as outlined here) times 50%. This amount is added to the individual’s total taxable income during the year of sale, and taxed at the applicable marginal rate.
He added that there were other situations where CGT impacted on residential property which needed different calculations and approaches.
“For example, other factors include where holiday homes are rented out for some of the time; where a property is inherited, how long a property is owned (especially if owned before September 1985); where a home is also used for business (such as a rural property or a doctor’s surgery attached to a house); or where land attached to a primary residence is subdivided.
“While some CGT will generally be payable in all these situations, understanding the rules and keeping good records can keep reduce the tax bill significantly, and keep the tax office satisfied,” he said.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.
For more information please contact:
Peter Bembrick – 02 9020 4223