Category: Estate Planning

Vacant Land Tax Deduction Changes Hit ‘Mum & Dad’ Property Developments

By pmraina

Legislation that passed through Parliament last month prevents taxpayers from claiming a deduction for expenses incurred for holding vacant land. The amendments are not only retrospective but go beyond purely vacant land and vacant land tax deduction.

Previously, if you bought vacant land with the intent to build a rental property on it, you may have been able to claim tax deductions for expenses incurred in holding the land such as loan interest, council rates and other ongoing holding costs.

The new laws, aimed predominantly at Mum & Dads (individuals, closely held trusts and SMSFs), prevent these deductions from being claimed. Since the new laws apply retrospectively to losses or outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date, and with no grandfathering in place, the amendments will not only impact those intending to develop vacant land but those who have already acquired land to develop. This is the same target as previous tax changes that denied travel claims to visit residential rental properties and depreciation claims on plant and equipment in some residential rental properties.

vacant land tax deductionThe changes however, go beyond purely vacant land for residential purposes. A Vacant Land Tax Deductions could also be denied for land with a building on it, if that building is not ‘substantial’. The only problem is, the legislation does not clearly define what ‘substantial’ means. The Bill suggests that a silo or shearing shed would be substantial but a residential garage for example, would not meet the test.

If the new measures prevent holding costs from being claimed as a deduction, then they will generally be added to the cost base of the asset for capital gains tax (CGT) purposes. This means that they can potentially reduce any capital gain made when you dispose of the property in the future. However, holding costs for CGT assets acquired before 21 August 1991 cannot be added to the cost base and these costs cannot increase or create a capital loss on sale of a property.

On the positive side, vacant land leased to third parties under an arm’s-length arrangement may continue to be eligible for deductions for holding costs after 1 July 2019 if the land is used in a business activity. Also, land used in a primary production business will generally be excluded from the new rules. However, deductions could still potentially be lost (at least to some extent) if there are residential premises on the land or that are being constructed on the land.

There are also carve outs for land which has become vacant or which cannot be used to produce income for a period of time due to structures being impacted by natural disasters or other events beyond the owner’s control.

The amendments do not apply if you (or certain related parties) carry on a business on the land or where the land is owned by companies, superannuation funds (other than SMSFs), managed investment trusts or certain public trusts.

CGT and The Family Home: Expats and Foreigners Targeted Again

By pmraina

The Government has resurrected its plan to remove access to the main residence exemption for non-residents. A move that will impact on expats and foreign residents.

Back in the 2017-18 Federal Budget, the Government announced that it would remove the ability for non-resident taxpayers to claim the main residence exemption. The unpopular measures were introduced into Parliament but stymied. An election later, a recomposition of Parliament and the Government has again introduced the reforms but in a modified form.

The proposed changes would apply from the original Budget announcement date back on 9 May 2017, so could impact on properties that have already been sold. However, a transitional rule would allow CGT events happening up to 30 June 2020 to be dealt with under the existing rules as long as the property was held continuously from before 9 May 2017 until the CGT event. That is, if you held property from 9 May 2017 up until the sale date, the existing rules might continue to apply.

If the measures pass Parliament, a non-resident taxpayer would be prevented from applying the main residence exemption to the sale of a property. Regardless of whether they were a resident of Australia for some or most of the ownership period.

For expats, there is a proposed exception to the new rules for situations where the individual has been a non-resident for 6 years or less and a specific life event occurred during the period of foreign residency. The life events refer to terminal medical conditions suffered by the individual or certain family members, the death of certain family members or a marriage of de facto relationship breakdown. That is, if you were working overseas for 5 years and your spouse died during this time, the exemption could still potentially apply to your Australian former main residence.

cgtFor non-resident individuals, there will be a significant flow-on impact if the legislation passes Parliament as:

  • They will miss out on a full or partial exemption under the main residence rules;
  • They will generally be taxed at non-resident rates (i.e., no or only partial tax-free threshold)
  • The CGT discount percentage could be less than 50%
  • The cost base reset rules which sometimes apply to provide an uplift in the cost base of the property to its market value at the time it is first rented out are unlikely to apply
  • The foreign resident withholding rules could impact on the cash flow position of the vendor

Currently, individuals are generally not subject to capital gains tax (CGT) on the sale of the home they treat as their main residence. If the home was your main residence for only part of the ownership period or if the home is used to produce income (for example, you use part of the home as business premises or rent out part of the property), then a partial exemption may be available. In addition, if you move out of your home and you don’t claim any other residence as your main residence, then you can continue to treat the home as your main residence for up to six years if you rent it out or indefinitely if you don’t rent it out (the ‘absence rule’).

The main residence exemption is currently available to individuals who are residents, non-residents, and temporary residents for tax purposes.

Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 is currently before the House of Representatives and is not yet law.

While you should plan for change, do not act specifically on these impending changes until they have passed Parliament.

 If you are concerned about how these impending changes may impact you, please contact us.

Prepare for Life, Are You Ready?

By Heaney Business Group
Estate Planning

Estate PlanningIf you don’t plan you could learn a hard lesson with assets being lost, family feuds or even money being handed to the government due to you not having made a Will or instructions on where it should be distributed.

For the Australian population, estate planning has become even more important as collectively our wealth has exploded over the last 25 years and looks set to continue.

14.5% of Australian are now 65 years old or over (approx. 3.8 million people). 55% of the country’s wealth is distributed to the Baby Boomer generation who only make up of 25% of the population. Australia is seeing a wealth distribution intergeneration change.

Estate Planning

Estate planning is critical to identify what will happen to your assets and liabilities if something happens to you. Estate planning will give everyone involved piece of mind and make sure your wishes are followed protecting your business partners and beneficiaries.

All of this planning will come in handy when tax outcomes are reviewed and if legal matters are required at a later date.

Being a business owner, you will need to consider a number of different issues that could be caused if you were no longer able to carry out your current role. These issues could include:

  • Who would perform your role?
  • Will your beneficiaries take a share of the business?
  • Will the business need to be sold?

These questions and many more can be considered as part of your estate planning requirements. This kind of planning is very important to help protect your beneficiaries and any business partners attached to the business, plus relieve any anxiety that could be associated with business structure going forward.

Estate planning does not have to be hard work, but it does have to be planned.

Other things to consider when planning your estate other than money could be

  • The care and maintenance of minor children.
  • Managing the respective rights and expectations of beneficiaries, particularly with blended families.
  • Avoiding disputes between family members.
  • Relationships outside of the immediate family.
  • Managing liabilities of the estate.
  • Assets which may not be capable of immediate realisation or where value will be diluted by realisation.
  • The transfer of assets through generations.

Need Help with Your Estate Planning?

For specific advice on your estate planning needs call the team at HBG Tax & Accounting on 9594 1963 and discuss your situation and requirements.

This article was written based on information supplied from Knowledge Shop Newsletter February 2019.