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Real Estate & Tax The Annual Acton Conference Bali 2009 Presented by: Craig Seddon

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Page 1: real estate & tax

Real Estate & Tax

The Annual Acton ConferenceBali 2009

Presented by:Craig Seddon

Page 2: real estate & tax

Contents1. Main residence

2. Property developer

3. Rental properties

4. Real estate industry employees

5. National Rental Affordability Scheme

Page 3: real estate & tax

1. Main residence

On disposal of a property:

An exemption from Capital Gain Tax (CGT) for any capital gain or loss;

In relation to a dwelling (or interest in a dwelling); and

Is the person’s main residence.

Page 4: real estate & tax

1. Main residence (cont’d)

Conditions to be met:

1. Must be an individual;

2. Dwelling was their main residence throughout the ownership period;

3. Must have an ownership interest; and

4. Interest not passed on from a deceased estate.

Page 5: real estate & tax

1. Main residence (cont’d)

Factors to consider:

Length of time lived; Place of residence of family; Address where mail is delivered; Address on Electoral Roll; Location of personal belongings; and Intention.

Page 6: real estate & tax

1. Main residence (cont’d)

Full exemption categories:

1. 6 year rule;

2. 2 main residence;

3. Holding land to build; and

4. First practicable time to move into.

Page 7: real estate & tax

1. Main residence (cont’d)

Example – 6 year rule

Gavin purchases his main residence in Mandurah in July 2007. Gavin travels to Subiaco for work during the week. After 5 months, Gavinbecomes tired of travelling and purchases an investment property(West Perth), to live in through his Trust.

Gavin charges himself rent (at market rates) from the Trust andclaims all related costs. Gavin rents the Mandurah property until it issold in March 2010.

The Mandurah property is sold tax free as it has been Gavin’sdeclared main residence for the past 6 years.

Page 8: real estate & tax

1. Main residence (cont’d)

Example – 2 main residence

Anita has a main residence in Peppermint Grove. Eventually, Anitagrows tired of her residence and makes an offer on a property in Mosman Park in April 2007.

The offer is accepted and settlement occurs in September 2007. Anita later sells her first residence in October 2007.

Anita is not liable for any capital gains tax on her first property as itsdisposed within 6 months.

Page 9: real estate & tax

1. Main residence (cont’d)

Partial exemption categories:

1. Adjacent land (separate disposal);

2. Different residences (individual and spouse); and

3. Income producing purposes.

Page 10: real estate & tax

1. Main residence (cont’d)

Did you know?

Exemption may not be applied where an individual is “in the business” of moving into properties for short periods of time while they renovate them for sale?

Adjacent land may be fully exempt where: Its used for primarily for private purposes; and Maximum area is less than 2 hectares (inc. dwelling).

Page 11: real estate & tax

2. Property developer

An individual or entity is considered a property developer when theproperty is held as past of the business.

If so, the following issues are considered: -

Application of trading stock rules;

Application of ordinary income rules on disposal; and

Installment sales contracts or off-the-plan development sales.

Page 12: real estate & tax

2. Property developer (cont’d)

Trading stock

Property will be held as trading stock by property developers or traderswhose business involves dealing in land. For an item to be tradingstock:

Property must be held for the purpose of resale; and

Business activity that involves dealing with land should have commenced.

[example]

Page 13: real estate & tax

2. Property developer (cont’d)

GST on development

When a developer builds a house on sub-divided land, the businessmust be registered for GST.

For example:

Ben owns a property in Mount Lawley, which sits on 900 sqm. Bendecides to bulldoze the existing house and build 3 houses on thenow triplex block. Ben will live in the front house.

Ben is considered to be in the business of dealing in land and mustbe registered for GST. Therefore, the sale price will include GST.

Page 14: real estate & tax

3. Rental properties

What is rental income?

Rental income earned;

Bonds – when entitled to retain;

Insurance payments;

Letting fees; and

Reimbursements and recoupment.

Page 15: real estate & tax

3. Rental properties (cont’d)

What are allowable deductions?

Advertising; Body corporate fees; Insurances; Quantity surveyor’s fees; Rates and taxes [council, water, land]; Repairs and maintenance; Travel – inspection; Etc, etc, etc.

Page 16: real estate & tax

3. Rental properties (cont’d)

Specific deductions.

Capital allowances [depreciation]Improvements to the property or asset replacements, such as:

Hot water systems; Landscaping; and Renovations.

Capital works [building write-off]Claiming the cost of the construction of the building over a 25 year period.

Page 17: real estate & tax

3. Rental properties (cont’d)

Common errors on claiming deductions.

Claiming renovations costs as deductions for repairs; Claiming deductions for legal expenses which are capital in nature; Including the cost of land in the capital works deduction; Overstating interest deductions that relate to private borrowings

[generally on refinancing]; and Claiming private expenditure as deductions [i.e. Plasma TV].

Page 18: real estate & tax

3. Rental properties (cont’d)

Insulation installation.

The existing Low Emissions Plan for Renters Rebate (previously $500)will be doubled to up to $1,000 for landlords with tenants and availablefor insulation installation until 30 June 2011.

The previous cap on the number of rebates will also be removed.

Note:

Eligible owner occupiers receive rebates up to $1,600 from 3 February 2009 to 30 June2009.

Page 19: real estate & tax

4. Real estate industry employees

Allowances – possible deduction.

The following allowances are generally received by real estateemployees and are in recognition that expenses may be incurred indoing their jobs.

The allowances are assessable income and the expenses incurred may

be deductible depending on the circumstance for:

Motor vehicle allowance; and Telephone or mobile phone allowance.

Referenced – Tax Ruling TR 98/6

Page 20: real estate & tax

4. Real estate industry employees (cont’d)

Allowances – reasonable amount.

The Tax Commissioner publishes a tax ruling annually that indicatesamounts considered reasonable in relation to the following expenses:

Overtime meal expenses covered by an allowance paid or payable under the terms of an industrial law or award;

Domestic travel expenses covered by a travel allowance; and Overseas travel expenses covered by a travel allowance.

Referenced – Tax Ruling TR 98/6

Page 21: real estate & tax

4. Real estate industry employees (cont’d)

Deductions.

A deduction is only allowable if an expense:

Is actually occurred; Meets the deductibility tests; and Satisfies the substantiation rules.

[Examples]

Referenced – Tax Ruling TR 98/6

Page 22: real estate & tax

4. Real estate industry employees (cont’d)

Deductions - examples.

Advertising; Gifts Home office – consumables & IT; Motor vehicle running costs; Registrations (i.e. REIWA); Subscriptions; Telephones, mobile phones & PDAs; Training, seminars & conferences; and Travel.

Referenced – Tax Ruling TR 98/6

Page 23: real estate & tax

4. Real estate industry employees (cont’d)

Did you know?

1. That you can claim a pair of sunglasses each year [no threshold] if you drive your car for work; and

2. Ladies may claim or salary sacrifice a handbag each year as a deemed briefcase [without any FBT implications].

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4. Real estate industry employees (cont’d)

Questions.

Craig SeddonWestcourt Consulting Chartered AccountantsLevel 1, 45 Royal StreetEast Perth WA 6004