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Rental Properties: Calculating the Cost Base for CGT Deductions
There is generally great excitement when you buy a property to generate rental income. You have all kinds of plans, and sweet dreams about the extra income it’s going to earn. However, somewhere down the line you will sell that property. Then you will have to confront what the tax man, euphemistically, calls a “Capital Gains Tax event”.
Sounds pretty intimidating, doesn’t it? But don’t worry, it’s fairly simple. The profit or loss you realise from the sale of the property is the “event”, and could be subject to CGT. Although CGT is a whole different ballgame, and will be discussed in greater detail in a future Baxton blog post, capital works deductions you make now can affect the calculations needed for CGT when you sell your property.
Deducting the deductions
When calculating a Capital Gains Tax profit or loss after the sale of a property, you will use the cost base or reduced cost base as the starting point for your calculations. The final, or adjusted, cost base you use must exclude any deductions you have claimed, or could have claimed, for capital expenditure.
There are two conditions attached to this exclusion:
- You acquired the property after May 13, 1997.
- You acquired the property before May 13, 1997, but spent the money which gave rise to a capital works deduction after June 30, 1999.
How does this work in practice?
Let’s say that you bought a rental property in 1998 for $200 000, and you sold the property in 2017. The cost base in 2017 is calculated at $210 250. However, during the time you owned the property you claimed $10 000 in capital works deductions. You will have to deduct the $10 000 you claimed, to arrive at a new cost base for calculating your Capital Gains Tax. Your new cost base would therefore be $200 250.
Limited recourse debt arrangements
If any part of the capital expenditure on capital works deductions was financed by a limited recourse debt, which includes certain hire purchase or instalment sale agreements, you must include excessive deductions for capital allowances as part of assessable income. But this only applies if the debt was terminated, or you did not pay the debt in full.
If you are unsure of what constitutes a terminated recourse debt arrangement, and its implications for assessable income, please consult a tax consultant. It could have far-reaching effects on your tax obligations.
Cost base adjustments, although influenced by capital works deductions, only have implications for Capital Gains Tax. However, we thought we should include it under Capital Works Deductions to alert those of you who will eventually sell your property to its effects on the Capital Gains Tax you will face then. As it is rather complicated, we strongly recommend you consult a tax expert for clarification on CGT, and any other tax implications of investment property.
This series of articles on the new tax regulations is brought to you by Baxton Property Management, the leading property managers in Australia, as part of their on-going aim to provide relevant information to both investment property owners and their tenants.
Written and syndicated by
– Baxton Media.
- Property Owners’ Tax: How do I claim on borrowing expenses?
- Rental property tax: Interest, land tax and other deductibles
- 6 things you can claim to maximise tax savings
We hope you enjoyed this article
The information contained in this article is based on the authors opinion only and is of a general nature which is not indicative of future results or events and does not consider your personal situation or particular needs. Professional advice should always be sought relevant to your circumstances.
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