Hi
My partner recently sold a block of land that belonged to him and his ex-partner. When they purchased it a few years ago it was always their intention to build on it & live in as their home.
As the ATO considers the land an investment it is subject to CGT. My question is what can be deducted from the sale profit?
Points I would like clarification on:
– Is the intital stamp duty, legal fees etc when purchasing the land used in the final cost of the land & therefore able to be deducted from the final sale profit to gain the actual profit?
– Can payments made on the land over the past few years (mostly interest only) be claimed as a deduction (I was thinking that he may need to amend past income tax returns submitted to the ATO by claiming the interest portion as a deducted)
– Can any other expenses like rates, selling agents fees & advertising also be deducted (either from his income or in the final profit made)
My thoughts are any costs associated with this block of land can be claimed as a deduction to either his income over the years or the final profit made on the sale. Surely the ATO can't tax you on something if you can't claim deductions.
All this may be wishful thinking though. Any help would be appreciated.
Thanks,
Hi
I think the CGT exemption only applies if a house was constructed – but check this with an accountant anyway as you may be totally exempt if it was your intention to build a house to live in.
But, if you claim this then you probably cannot go and claim the ongoing costs of holding the land such as interest and rates etc. If it was an investment from the beginning, then you should be able to amend the last 4 years tax returns to claim the interest and other costs – such as rates, water, maybe mowing etc.
As for CGT, you should be able to claim all stamp duty, selling costs such as agents fees and legal fees on buying and selling. Download the CGT booklet from the ATO site.
(Check this with your accountant)
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
The main residence exemption applies to a "dwelling", which is defined to include "any land immediately under the unit of accommodation". However, generally speaking, a "unit of accommodation" must be a building, a caravan, houseboat, or other mobile home. Therefore, unless your partner had lived on the vacant land in a dwelling as described, my view is that he will have difficulty applying the main residence exemption, ie, any capital gain derived will be subject to CGT. If he has held the land for at least 12 months, the 50% CGT discount will apply.
When you calculate the CGT, you can include incidental costs on purchase AND sale as part of the cost base of the property, which includes stamp duty, legals, valuation, etc. The interest may also be added to the cost base as a holding cost (including items such as land tax, rates, etc), provided that a tax deduction has never been claimed on the particular expense.
Eddie
[email protected]Thanks for the replies.
We met with our Accountant and we've been told all related expenses come off the profit, including interest repayments on the loan.
Great news as it means these expenses cancel out the profit & therefore we no tax is due
Hi,
What if their is a capital loss. Is this loss offset against other income ?
Thanks.
A capital loss can only be offset against capital gains, it can't be offset against ordinary income.
I think that all the expenses my partner paid out were actually more than the capital gains, so therefore a loss was incurred and he doesn't have to pay any tax.
I don't believe we are applying the loss to his normal income (so he doesn't get a refund) – it may be carried forward to any future capital gains???
Narelle, it is a capital loss hence it cannot be offset against income (only against capital gains). The loss can be carried forward indefinitely.
Hi,
I sold my land at 5k profit. This does not include any fees , costs or intrest payments made on the land. I had the land for almost 3 yrs. Can I claim the intrest payments I made on the loan?Sushiboy, yes you probably can – if it was your intention to build an investment property when you bought the land. But interest should be claimed against the income not the capital gains, so you may have to go back and amend your tax returns for 3 years – and this may save you more tax.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hello sushiboy
I think it's worth your while to go to an accountant to sort this out for you.
If you only made $5K profit without taking into account all costs, interest etc. you probably have a very nice capital loss which you need the ATO to know about so that you can use it to wipe out part of a future capital gain.Sorry to disagree Terry but surely unless the block of land was rented out to earn income it's not possible to claim expenses…including interest… on your tax return ?.
However, judging by Rellie's post after seeing their accountant, interest and other costs can be used for CG or loss calculation.
Best see an accountant
ElkaHi Elkam
This was decided in the case of Steele v FCT a few years ago. The result was that as long as your were intending to build a rental property then all rates, water, and interest would be deductible.
I can dig it up if you would like a read.
in fact, it may work out better for Narelle to claim the costs of interest etc agaisnt her income as having a large capital loss won't help save tax until a gain is there to offset it.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thank you Terry.
I wasn't aware of that. I thought you actually had to have income.
Good to knowIf it's easy for you to find the case that would be great.
Cheers
Elkahi Elka
Here is a link to the tax ruling. There are links to the cases at the bottom if you are keen to read them
TR 2004/4
Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities
http://law.ato.gov.au/atolaw/view.htm?locid=%27TXR/TR20044/NAT/ATO%27&PiT=99991231235958
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
and http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1999/7.html?query=^steele
for Steele v FCTTerryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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