Out of Touch...Strategy Suggestions welcome

[SamSiam]

I have been out of the Oz and particularly the Melbourne market for 10 years now...so lethargy and lack of current knowledge has spurred me to seek a little well informed info here.

I could sell a current property and take out $2 million from it and apparently would be up for circa $400k cgt...and my understanding is that I would have 2 years to reinvest this full amount (2 Mil) into other revenue earning property and not have to pay the cgt....so basically endlessly deferring it into the future.

I have been contemplating selling it and reinvesting in other property and taking the capital gains from it over the 10 years I have had it. Problem with this property is that the return currently is not as good as possibly cashing it in ad reinvesting....I have not done the sums yet...lethargy kicks in....but thinking doing this should increase the nett return to what it is now.

Anyway...I have another little project I am working on for this property and if that works, then that is my preference, but it is always nice to have a backup plan.

What sort of properties can you buy for that amount....several rather than just one or two....and current prices and rental returns expected etc.

I do not need a home in Oz, but a future property for my kids for university perhaps might be a nice plan. Other than that I prefer land and property over just an apartment itself. I would also prefer them in the same location...by this I mean Melbourne, or Sydney etc...not all over the country. Some reno work on a few might be a nice hobby also, but my time in country would be very limited due to kids schooling over here.

My personal situation which does effect things is that I do not have a profession or salaried income at all, it all comes from property.

Any questions welcome...any advice welcome also....interested to hear all the angles. I have my own basic thoughts, but again nothing set in cement and not even some figures scratched out on a napkin.

Cheers

 

[Rolf Latham]

defer CGT for 2 years sounds useful

I cant do that, do u have some form of non resi tax benefit to do that ?

ta'rolf

 

[coastymike]

Sounds like the small business cgt concessions replacement asset rollover. If just a resi property you wont get it but if a guest house, temporary student accommodation, etc he may well do so.

I always recommend clients look at this as part of their strategy for investing in resi property as you could potentially defer the capital gain for many many years.

http://www.ato.gov.au/corporate/content.aspx?doc=/rba/content/85888.htm

 

[SamSiam]

To be honest...that stuff pains me to no end and i try to ignore it as much as possible.

But, it is what my Accountant has told me and a friend is doing the same now with a property he owns and has sold, so he gave me that info first hand.

I believe it could be CM's advice above.

It is a commercial property, not resi.

I do want to hear some thoughts from others on what they would do in a similar position though.

But....while on this subject....does anyone know if the deferred cgt is put off in whole, or part and if in part, do you still have to pay the cgt on that part in the 2 year time frame ?

For example....2 million with for round figures 500k cgt due.....if you reinvest the full 2 mil...no cgt due until you eventually cash in and pull the funds out, which could be 5 years or never.

But....if you only reinvest 1.5 mil....do you pay cgt on the 500k balance at the end of that 2 years ?

Cheers

 

[coastymike]

Sam

It is a complex area.

First question is whether you meet the $2m turnover test or if not the $6m net asset value test.

Once answered the next question is whether the asset is an active asset. If the commercial property is used in connection with a business you run then it will probably qualify as an active asset. If it is a commercial property leased to independent third parties (e.g. Coca Cola) then it will not be an active asset and the concession will not apply. Rollover would not be eligible in this case.

Then you need to determine the components of the capital gain, one being the replacement asset rollover. It basically gives you two years to purchase a replacement ACTIVE asset. If after the two years you don't purchase a replacement active asset then CGT Event J5 occurs and you have some more decision making.

Other factors include who holds the asset. Is it an individual, trust or company as these also change how things work. Given your age, situation, etc the other concessions may be better used than the replacement asset rollover.

Lots of things for your accountant to consider. Get professional advice from them as the tax differences could be substantial. I've seen many people get this one horribly wrong.

 

[Aaron Sice]

Sounds like the small business cgt concessions replacement asset rollover. If just a resi property you wont get it but if a guest house, temporary student accommodation, etc he may well do so.

I always recommend clients look at this as part of their strategy for investing in resi property as you could potentially defer the capital gain for many many years.

http://www.ato.gov.au/corporate/content.aspx?doc=/rba/content/85888.htm

wholly sheet!

so, effectively, he has designed the lease agreement so that they do not pay "rent" as defined by the income tax assessment act, and they have no legal right to occupy a designated space only permission to occupy A room at the owner's discretion, therefore the premises was let for the purpose of deriving income, not rent, therefore is allowed a CGT rollover as per the itaa 152-40!

clever clever clever!

Perp - surely you'd be all over this?

Where premises operate as student accommodation, as in this case, the issue arises as to whether the occupants of the units are tenants or alternatively only a lodger/boarder with a licence to occupy.

Relevant factors include whether the occupier has a right to exclusive possession of the premises (Radaich v. Smith (1959) 101 CLR 209 at 222), the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities (Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838; Marchant v. Charters [1977] 3 All ER 918).

In this case, the entity owns a building containing between 5 and 10 units which it uses to operate the business of providing accommodation to students. The students enter into arrangements to occupy the units with the average length of stay being less than one year. The entity established the business specifically to provide accommodation for students.

It is considered that the entity have never intended for the students to have an interest in the units, the students only have permission to occupy the room. The entity has always intended to retain ownership of all the units. All utilities (gas, electricity, water, council rates and insurance are paid for by the entity.

According to the standard lease agreement between the entity and a student, the entity retains the right to enter the rooms at any time without having to notify the students. The standard lease agreement contains a number of restrictions that have been placed on the students' use of the rooms that are not normally associated with a lease relationship. The entity has also stated that it retains the right to move the students from one room to another should the need arise; allocation to a specific room is similarly not part of the standard lease agreement.

Additionally, the entity provides services including cleaning, grounds maintenance and provision of internet connections to the students which are not usually associated with rental properties.

When considered together, the services and facilities provided to students are relatively significant. The arrangements entered into indicate that those staying in the units did not have the right to exclusive possession of the unit but rather only a right to occupy the unit.

The relationship between the entity and the students staying in the units is not a landlord/tenant relationship as the services provided, and the restrictions placed on the students would not be expected by a normal tenant.

Accordingly, the income derived is not 'rent' and therefore the exclusion in paragraph 152-40(4)(e) does not apply.

Conclusion

As the rooms are used in the course of carrying on a business but are not used to derive rent, the premises will be an active asset under section 152-40 of the ITAA 1997.

 

[coastymike]

Aaron

Yes this is an area I think accountants can add some real value. Unfortunately many are not aware of these rulings.

 

[Aaron Sice]

mate you've just openend up a whole new avenue for ANYONE involved in student accomodation.

 

[SamSiam]

CM...yes it is a complex issue which gives me headaches just at the thought.

The property is leased out and could be classed as active...certainly my accountant has already advised that the rollover is suitable to me, but hey...he could be wrong.

The property is held in a company.

 

[coastymike]

A company. An even bigger nightmare. Ill leave it to your accountant as there are a myriad of issues. Ato audit well on top of this. Just had one client who came to me during audit and accountant had screwed it all up. Cost the client 400k in tax and another 250k in penalties and interest. Get the advice in writing sam.

 

[Dazz]

Great posts coastymike. Kudos.

 

[SamSiam]

and accountant had screwed it all up.

Thats what worries me...always does.

I really dislike all the Australian hassle these days.....I did 10 years ago, even worse now I imagine.

Over here it is so easy....not perfect....but relatively simple to get around those types of issues.

 

[dan c]

wholly sheet!

so, effectively, he has designed the lease agreement so that they do not pay "rent" as defined by the income tax assessment act, and they have no legal right to occupy a designated space only permission to occupy A room at the owner's discretion, therefore the premises was let for the purpose of deriving income, not rent, therefore is allowed a CGT rollover as per the itaa 152-40!

Not only would you get rollover relief, but also a 50% active asset deduction and a retirement exemption, if you qualify as a small business.

So say you sold a business or asset that qualified as active (like the example above) for a $1m capital gain. You would get a 50% deduction for holding the asset for over 12 months (assuming it wasn't held in a company), a further 50% deduction for it being an active asset. (50% of the balance, or 25% of the total gain.)

You would then have tax to pay on $250,000. You could then use the retirement exemption and put $250,000 into superannuation.

You would then have $750,000 capital gain in your hands, tax free.

 

[Terryw]

A company. An even bigger nightmare. Ill leave it to your accountant as there are a myriad of issues. Ato audit well on top of this. Just had one client who came to me during audit and accountant had screwed it all up. Cost the client 400k in tax and another 250k in penalties and interest. Get the advice in writing sam.

yeah, but he probably saved $400 on his accounting fees!