Subdividing your main residence and selling the subdivided block – what costs can you claim?

If you are considering subdividing your main residence and selling the new block, the profit on the sale of the subdivided block is subject to capital gains tax. In order to calculate the capital gain made on the sale of property, you will need to know the sale price and the cost base. There are several expenses that you can add to the cost base of your newly created property which will decrease the profit you make on the sale of the land, and therefore the capital gains tax you pay.

Expenses that you can add to the cost base of the new block are as follows:

– A portion of the original property cost
– Subdivision costs
– Construction costs (if you build on the new block)
– Council rates
– Water expenses
– Electricity expenses
– Interest on the property loan
– Repairs and maintenance
– Insurance expense

The above expenses are generally apportioned on a reasonable basis between the original dwelling and the new block, except for payments that are solely attributable to new property (for example, construction costs if you build a house on the new block).

It is essential that you have all the information necessary to calculate the correct cost base amount in order to avoid a larger capital gains tax bill.

Pro tip:

Although subdivision costs are generally apportioned across the two properties, the costs of connecting electricity and water to the new block can be solely attributed to this block.

Author: Tessa Jachmann
Email: Tessa@faj.com.au

Four year construction rule when you subdivide your home and move into the subdivided lot

As mentioned in our previous blog (Four year construction rule when you buy vacant land or renovate), the main resident exemption is the concept whereby your home (otherwise known as your main residence) is exempt from capital gains tax (CGT). Under the four year construction rule, you can choose to treat your new house as if it were your main residence for up to four years before it actually becomes your main residence.

This concession is also available if you decide to subdivide your existing home and move into the newly constructed house on the subdivided block. The effect of applying the four year construction rule in this circumstance is slightly different to when you purchase a new property as per the previous blog.

If you subdivide your home and construction of the new house takes less than four years, the main residence exemption will apply to the new house for the four years prior to moving in, including part of the time before the land had been subdivided. So say you purchase your original house in January 2008 and subdivide you family home in May 2011. Construction is completed in October 2013 and you move in straight away. Using the four year construction rule, you are able to claim the main residence exemption for the four years immediately before you move in to the subdivided lot, which is October 2009 (so before you subdivided).

Similarly to the previous blog, if construction of your new house on the subdivided lot takes more than four years from the time subdivided to the time you move in, then the exemption is limited to the four years immediately before the property becomes your main residence.

Pro tips:

  • Remember, you can only treat one property as your main residence at any time. This means if you choose to apply the four year construction rule to the new residence on your subdivided lot, your original property would be liable to CGT.
  • If you elect to use the four year construction rule, you must move into your new home as soon as practicable after it is completed and you must live in it for at least three months to be able to use this concession.

Author: Tessa Jachmann
Email: tessa@faj.com.au

Four year construction rule when you buy vacant land or renovate

Generally, if a house is classified as your main residence (meaning it is your home), then it is exempt from capital gains tax (CGT). This concept is referred to as the main residence exemption.

If you buy a vacant lot that you plan to build your new house on, or if you buy an existing home that you are renovating before you move in, then you are able to claim the main residence exemption from the date that you move in to your new house.

However under the four year construction rule, you can choose to treat your new house as if it were your main residence for up to four years before it actually becomes your main residence. This allows you to apply the main residence exemption for a period of up to four years immediately before the date you move in to that house, during which time your new house is either being constructed, repaired, or renovated.

The effect of this concession depends on your circumstances. If construction or renovations take less than four years from the time you purchased your new property, then the main residence exemption will apply for the entire ownership period. An example of this is if you purchased your new property in May 2011 and completed renovations/construction by October 2013 and move in straight away. In this circumstance, you can claim the main residence exemption for the entire time as the time between purchasing your property & moving into it is less than 4 years.

If renovations or construction take more than four years from the time you purchased or subdivided to the time you move in, then the exemption is limited to the 4 years immediately before the property becomes your main residence. So working on the above example, say you purchase the new property in May 2011 but renovations or construction aren’t completed until October 2016 – in this case, the main residence exemption can be applied from October 2012. This means you may be liable to pay capital gains tax for the period from May 2011 to October 2012.

However, it is important to note that you can only elect to use the four year construction rule if the following conditions are met:
• The new home becomes your main residence as soon as practicable after it is completed
• The new home continues to be your main residence for at least three months.

Pro Tip:

  • No other dwelling can be treated as your main residence (i.e. exemp from CGT) during the construction period, however there is a rule for changing main residences where you may be able to treat both homes as your main residence for a six month period.

Accountant: Heather Cox
Email: heather@faj.com.au

Private Health Insurance – The carrot and the stick

The government wants the majority of taxpayers to have private health insurance to reduce the costs for the Medicare system.

The government aims to attract people towards holding private health insurance by giving a rebate for premiums paid by people below a certain income threshold and penalising you if your income is above a certain threshold and you don’t have health insurance.

This link outlines the thresholds and rates for the implications of either having private health insurance and receiving the rebate or not having private health insurance and paying the Medicare levy surcharge.

The amount of rebate you receive or penalty you pay depends on how much taxable income you or a combination of you and your spouse make for the year.

Pro Tip:
Purchasing private health insurance is a personal preference. However, if your income is above $140,000 for singles or $280,000 for couples then the surcharge is $2,100 or $4,200 respectively. It is likely that you could get some form of health insurance for less than this. The private health insurance needs to meet certain criteria to qualify, so make sure you specify with your health fund that the policy qualifies you for the rebate or for the avoidance of the surcharge.

Note:
Lifetime Health Cover (LHC): is designed to encourage people to purchase and maintain private hospital cover earlier in life. The amount of a person’s LHC is determined by the number of years they are over 30 years old at the time they take out hospital cover. Each year will attract a 2% hospital cover premium. The maximum LHC loading applied is 70%.

Author: Rhys Frewin
Email: rhys@faj.com.au

Is the cost of your new website deductible?

The cost of developing a new website for your business is not usually tax deductible in full. The costs can be depreciated which generally means you receive the benefit of a tax deduction over a few years, although there are some concessions for small business owners.

If you are a small business (you have a turnover of under two million dollars) you may choose the simplified depreciation rules.
These rules allow you to immediately write of the website development costs incurred during the year, provided the total development costs for the website are less than $20,000 and the website is completed by 30 June 2017.

If your total costs are above $20,000 and you are a small business you may allocate the cost to the small business pool. The small business pool allows you claim the following:
• A 15% deduction for the first year
• A 30% deduction each year after the first year

For larger businesses to whom the simplified deprecation rules do not apply, the cost of the website can be depreciated over 5 years – i.e. 20% per year. For example:

Website development costs of $100,000 are incurred in March 2017 by a large business. The business can claim $20,000 in 2016/2017 and $20,000 in each year after up until 2020/21.

For ongoing expenses such as domain name registration fees, hosting fees, maintenance and minor enhancements you are able to claim a full deduction for these when incurred.

Pro tip:
Small businesses wanting to take advantage of the $20,000 immediate write off must have their websites completed and ready for use by 30 June 2017. After this date the immediate write threshold will reduce to $1,000.

Author: Lachlan Hunn
Email: Lachlan@faj.com.au

Making a family trust election

Many trusts have the words “family trust” in the title but just because a trust is called the Smith Family Trust doesn’t mean it meets the ATO definition of a family trust. To be considered a family trust you must specifically make a family trust election on your trust income tax return.

There can be numerous benefits to making the family trust election, some of these are:
– More relaxed tests for claiming tax losses
– More relaxed tests for injecting other income into a trust (to utilise tax losses)
– Ability to claim over $5,000 in franking credits

However as a consequence of making the family trust election you can then only distribute income within your family group. If your trust distributes income outside of your family group the distributions are taxed at the highest tax rate (currently 49%).

The family group revolves around a main person (nominated as the “test person”) which is chosen when you make the family trust election.

For more information on individuals that are part of the family group, click here.

Additional members of the family group can include:
• Estates of the individuals above
• Family Trusts with the same test person
• Companies or Unit Trusts 100% owned by the above
• Certain other entities (less common)

If you have losses in your trust or receive franked dividends of $11,667 or more for the year, you may need to consider whether a family trust election needs to be made.

Pro tip: Family trust elections can be back-dated to 1 July 2004 or later as long as distributions have not been made outside the family group during that time.

Author: Stacey Walker
Email: Stacey@faj.com.au

When do I need to pay super for contractors?

It’s easy to assume that if you use contractors in your business that you don’t have to worry about paying super, but unfortunately this is not the case.
The Australian Taxation Office (ATO) looks more to whether the contract you employ them under is mostly related to labour. Where this is the case the ATO will consider the worker to be an employee, and you will need to pay super for contractors.

The ATO provides three different types of exertion that it considers labour:
1. Physical labour
2. Mental effort
3. Artistic effort

What happens if the contractor provides a mix of services?

Under the contract the ATO states that you only need to pay the super guarantee portion of the contract that is related to labour.
The ATO provides guidance on how to work the portion of the contract related to labour where it hasn’t been specifically mentioned. As per the ATO website:
“If the values of the various parts of the contract are not detailed in the contract, the ATO will accept their market values and will take the normal industry practices into consideration.
If the labour component of a contract cannot be worked out you can use a reasonable market value of the labour component of the contact to represent the salary and wages of an employee”

What do I need to do know?

First you need to determine whether or not this is applicable to you.
The ATO provides a number of tools for business to use which clarify your position as provided below.

Employee/contractor decision tool
Superannuation guarantee (SG) eligibility decision tool
Superannuation Guarantee (SG) contributions calculator

What penalties can I incur?

If you don’t pay your eligible employees super, or pay it late you are liable for the super guarantee charge and will need to lodge additional forms with the ATO.

Save yourself some hassle and if unsure give us a call and we will guide you through.

Author: Elissa Bonser
Email: elissa@faj.com.au

Thinking of suspending your private health insurance while you travel?

Thinking of doing some travel and suspending your private health insurance? Cancelling your private hospital cover may have a detrimental effect on your refund at tax time.

If you have earned over the threshold amount, ($90,000 for singles $180,000 for families) and suspend your policy whilst you travel overseas, you won’t have adequate private hospital cover for that period.

Having inadequate private hospital cover means that you may be liable for the Medicare levy surcharge for the number of days you weren’t covered.

Depending on your income level it could be more effective to pay the premiums and not suspend the policy in order to avoid the surcharge.

If you need help deciding whether suspending your private hospital cover is right for you give us a call on 9335 5211.

Author: Elissa Bonser
Email: elissa@faj.com.au

Is there any GST when buying a commercial property?

Clients often ask if there is any GST when buying a commercial property. The GST treatment will depend upon the GST registration status of the seller.

Normally attached to the offer and acceptance is a GST annexure. This annexure will stipulate how the GST will be applied. On commercial properties there are 3 possible outcomes.

1) The seller may not be GST registered and therefore no GST would be applied.

2) The seller is registered and they advise that GST will be charged in addition to the price

3) The seller is registered and both parties agree to use the GST Margin scheme.  This means that the price is inclusive of GST but the purchaser is unable to claim any GST back and

4) If the seller and purchaser are registered for GST and the property is being sold with an existing tenant, then the contract may agree that the property is being sold as a ‘going concern’ and therefore no GST would be applied on the transaction

If you are buying the premises for business purposes and will be registering for GST then any GST you pay will be claimable as a refund from the ATO on the next Business Activity Statement.

Pro Tip
Transfer Duty is charged on the total value of the transaction including GST. This means that a purchase of a property GST free is going to be cheaper than purchasing another property of the same value plus GST even though ultimately you are refunded the GST later.

Author: Stacey Walker
Email: stacey@faj.com.au

Subdividing your Main Residence and Selling the ‘Backyard’

If you subdivide your main residence and sell the newly created block, any profit from the sale of the vacant land is treated as a capital gain, and therefore subject to capital gains tax.  The main residence exemption does not apply to vacant land that is sold separately to the dwelling (your family home).

There is an exception where the family home is accidentally destroyed (e.g. by fire), and the land on which the family home originally stood is sold without another house being constructed on that land. You can choose to continue to treat the vacant land as your main residence from the time of destruction up until the time the ownership of the land ends.

Calculating the Cost Base of the Subdivided Land

As the original property has been split into two assets, the cost base of each block is calculated by reasonably allocating the original cost of the property between the subdivided lot and the remainder of the property at the time of subdivision.

The ATO states that it will accept any apportionment approach that is appropriate in the particular circumstances. For example, where the new blocks are of equal size and value, then an apportionment based on the area would usually be appropriate. If the new blocks are of unequal size or value, then an apportionment based on the market value of each block at the time of subdivision can be used.

Apportionment of Subdivision Costs

Subdividing the family home will often incur subdivision-related costs. These can include survey fees, legal fees, subdivision application fees, and cost of connecting electricity and water to the vacant block.

Many people get caught in the trap of thinking that these costs are solely attributed to the cost base of the new property. However, most subdivision costs must be apportioned between both blocks, based on the same apportionment method used to allocate the cost base of the original property.

On the other hand, the costs of connecting electricity and water to the subdivided block can be solely attributed to the new block, as these costs only relate to the vacant land, and do not relate to the original dwelling.

Pro Tip:
If your family home was acquired before the 20th of September, 1985 (i.e. pre-CGT), the sale of any subdivided land from your main residence will generally be exempt from capital gains tax. This is because subdivision does not trigger any CGT event and therefore the subdivided land retains its pre-CGT status.

Author: Tessa Jachmann
Email: Tessa@faj.com.au