TAX – it’s one of those things that we all love to hate! This article offers some great info on how your granny flat could be affected by current taxation rules, along with some simple calculations to show you just how much tax you might be liable to pay.  It’s worth a read for all investors!

CGT granny flat crackdown planned in bid to prevent evasion and elder abuse

Duncan Hughes, The Australian Financial Review

4 January 2019

 

The federal government has ordered in investigation into capital gains tax paid on popular granny flat-arrangements between grown children and their parents in a bid to prevent tax evasion and to protect elders from abuse.

It comes amid warning from tax experts about traps that could snare property owners who decide to boost their income, property value or provide accommodation for a relative by building a granny flat.

Many stumble into tax problems because they ignore (or are unaware of) potential tax liabilities at the outset, resulting in a nasty surprise when they declare their income or sell.

“It is something that needs planning,” says Mark Chapman, director of tax communications for H&R Block.

In addition to income tax on rental returns, there is the prospect of capital gains tax (GCT) and, in limited circumstances, goods and services tax (GST).

Some taxes, like capital gains, are a “slow burn”, adds Chapman.

“It is a tax issue that only comes to light years after the transactions actually occurred – hence the need to be proactive and get advice before actually undertaking the transaction,” he says. Those planning eventually to sell a granny flat should check with their accountant about potential legal traps and demand for this type of property in the local area.

Most granny flats are built as extensions to the family home, which means once they are built the land cannot be subdivided into separate titles or sold as a separate property or strata title.

Those building a full-sized granny flat dwelling that they might later want to sell are advised to split the property title, then build on the new empty lot.

A flat rented to granny (or another relative) for a nominal amount, says Chapman, would not be regarded as a commercial transaction and neither income nor expenses would be taxable or deductible.

It becomes more complicated if rented to third parties or where taxable commercial rents are charged. Expenses incurred in running the flat – such as a proportion of utility bills and land taxes or borrowing costs from the construction of the flat – are deductible.

It might generate a taxable profit – or loss to claim against other income – depending on the circumstances.

 

CGT

There’s also the risk of capital gains on the main residence, which is normally exempt.

“The good news is most people do not have to worry about GST when it comes to granny flats,” says Ken Fehily, director of Fehily Advisory, a GST specialist.

Take as an example a house purchased for $300,000 in 2005 and sold for twice the price 10 years later.

In 2010 a granny flat worth $150,000 and occupying one-sixth of the total area was built and rented to a third party.

That means one-sixth of the gain arising from 2010 to 2015 ($150,000/6=$25,000) will be liable for capital gains, says Chapman.

This example is illustrative and to avoid complexity excludes deducting the granny flat’s construction costs.

Chapman says CGT deductions are based on the size of the granny flat and its age.

A flat that hasn’t been rented out and is an integrated part of the family’s lifestyle could also qualify for the main residence exemption, he says.

Another potential CGT liability arises if elderly parents living in the granny flat have an agreement ensuring secure accommodation for some form of payment.

Typically, the parents transfer the title of their house, or proceeds from the sale of the house or other assets, to an adult child in exchange for ongoing care and housing.

A formal agreement means the homeowner may have to pay capital gains tax on the amount paid by the parents, says Chapman. The CGT event happens when the contract is signed and will need to be paid in the next tax year.

“The agreements are intended to provide security for parents and avoid them being turfed out if, say, there is a relationship breakdown,” he says. “But it can cause headaches and the CGT issue has deterred formal family agreements.”

The federal government has asked the Board of Taxation to review the tax treatment of these arrangements and recommend any changes that would encourage families to enter formal family agreements involving accommodation.

It follows the Australian Law Reform Commission recommending formal and legally enforceable agreements to prevent elder abuse.

More than 12 per cent of people aged over 85 live with children or other relatives, according to government analysis.

 

GST

Some property investors who build a flat in their backyards with the intention of a sale might need to apply for an Australian Business Number (ABN) and pay goods and services tax (GST) under recently-introduced tax laws intended to stop fraud in the building industry. GST is a broad-based tax of 10 per cent on most goods and services and other items sold or consumed in Australia, according to the ATO.

“The good news is most people do not have to worry about GST when it comes to granny flats or additional stand-alone buildings on an existing residential site, for grannies or other relatives,” says Ken Fehily, director of Fehily Advisory, a GST specialist and advisor to the federal government.

Buildings or renovated properties sold five years after construction will not be liable for goods and services tax, he says.

“The only scenario where there is a GST situation is where new residential premises were built and sold within five years of construction,” Fehily says.

The following example illustrates the tax imposte for a property where the granny flat was built, rented for three years and sold within five years.

A new residence sold within five years of construction for, say $200,000, will face 10 per cent GST based on the sale price less the cost base, which is called the margin.

If the cost of the land was $90,000, then the GST, including tax concessions, is $10,000.

The owner can claim back 87 per cent of the first $5000 of the $55,000 construction costs (or $4350) as a refund.

No GST is payable on the rent of $10,000 a year for three years, or $30,000. So the total tax bill will be around $5650.

“That’s a good profit on the rent and sale on land that was worth $90,000 when building started,” says Fehily.

“Yes, there is GST registration to do and the developer will have to lodge quarterly GST business activity statements and keep records. The GST issue is not a deal killer but there are other tax issues to consider.”

Developers are encouraged to check on GST with a tax expert.

Nearly 100 granny flats are being completed each week in Sydney alone, a three-fold growth in five years, according to state government figures.

Granny flats may be rented out in Western Australia, the Northern Territory, Tasmania, NSW and ACT, but cannot be offered as rental apartments in Queensland, Victoria and South Australia. There are also rules about how big a granny flat can be based on the property size.

Requirements for planning permits and approvals also vary between states.

 

First step – talk to your Tax Specialist

Second step – talk to your Granny Flat Specialist!

 

Sonia Woolley

0403 309 136

Savvy investors are taking advantage of the tight rental market, and are looking at ways to increase their income… adding a Granny Flat to your existing property is a fantastic option.  More housing, more income – it’s win-win if you ask me!

Australia’s residential vacancy rate tightest it has been in years

Sophie Foster, The Courier Mail

13 November 2018

Brisbane has seen its vacancy rate fall while Sydney is treading water with over 19,000 homes vacant.

 

The national vacancy rate has dropped to its lowest level in just over four and a half years, with it now harder to find a home to rent in Brisbane than Sydney – though nowhere near as shocking as Hobart.

Nationally the rate hit 2 per cent with 67,350 properties vacant across the capitals — of which Sydney alone now makes up 28 per cent.

There were just over 9,000 homes up for rent in Brisbane in October, with its vacancy rates shrinking 0.2 percentage points to 2.7 per cent in the month.

That was 0.1 percentage point tighter than Sydney at the moment (2.8 per cent), where there were now over 19,400 homes sitting vacant — the highest the city has been in 13 years according to the latest SQM Research vacancy report.

Last year — when the two cities made up a third of all vacancies — the gap between the East Coast pair was just 1,721, but that’s busted out to over 10,300 more vacancies in the NSW capital over Brisbane.

The true shocker in the data though was the situation that continues to face Hobartian renters dealing with just 78 properties vacant in October — the tightest vacancy rate in the country of just 0.3 per cent.

Only Canberra came close to that (0.6 per cent), while Adelaide was sitting on 1.1 per cent vacancy rate, Melbourne 1.6 per cent. Perth was also seeing significant tightening to (3.3 per cent), though it had come off a relatively high rate compared to October 2017 (4.4 per cent). The highest vacancy rate was out of Darwin (3.8 per cent) where there were 1,170 properties up for rent last month.

SQM Research managing director Louis Christopher said the falls across many smaller cities drove the national vacancy rate down despite Sydney busting out by a full percentage point compared to the same time last year.

“In Hobart, there is a severe shortage of rental accommodation with just 78 properties available to rent, and rents are rising quickly, with no slowdown in sight.

“In Canberra too, where many renters live, there are just 387 rental properties available, putting upward pressure on rents. Melbourne’s vacancy rate has remained at low levels over the year. In contrast, we are seeing a surplus of rental properties in Sydney and rental costs are falling, a trend we expect to continue into 2019.”

Brisbane (9,024) now also has less rental properties available than Melbourne (9,320).

The SQM Research weekly rents index saw both houses and units fall in Sydney (-2.6 per cent) and Darwin (-8.4 per cent) over the year to October.

SQM calculates vacancies “based on online rental listings that have been advertised for three weeks or more compared to the total number of established rental properties”.

Whether you’re in Brissie or Tassie, if you want to double your rental income too – CALL US!

Sonia Woolley

0403 309 136

For some, moving in with their kids is the best option as the retiring years creep up on them.  However before any decisions are made, it’s important to do your homework to see how it will affect things both financially and legally. Here are a few points that you need to consider…

Granny flat issues: What you need to know before moving in with the kids

Starts at 60

3 November 2018

 

An increasing number of seniors are forgoing retirement villages and aged care facilities and instead opting to sell their homes and move in with their kids, a prominent lawyer has revealed.

The idea of granny flats has become all that more appealing for a growing number of pensioners who are struggling to get by with limited personal savings and government support.

Speaking to Starts at 60, CRH Law lawyer Brian Herd said moving in with children for some is the only option and on the surface seems like an attractive alternative to conventional residential aged care.

“In many ways it is a back to the future trend because before the 1950s it was what most families did until the church and charitable sector started to build what was then called ‘convalescent homes’ now called aged care facilities,” he explained.

While there are many benefits to granny flat living, including living in a familial environment, getting support from people who you know well and trust and saving on the financial cost of traditional aged care, Herd said there are plenty of legal and financial issues to consider before making the move.

According to the lawyer, many people jump into the arrangement before really thinking about the implications of the situation, including how it might affect their pension and their relationship with their family. Some experience a loss of independence and freedom as they try to adapt to the new way of life, while others struggle to get along with family members or find themselves turning into in-house baby sitters.

In order to avoid any potential family rifts and keep the transition as smooth as possible, Herd suggested seeking legal and financial advice before the arrangement is entered into and getting everything in writing.

“The beauty of documenting is that it forces the family to identify and confront the issues that need to be addressed, both the upsides and the downsides of the arrangement,” he said. “A document can also help in being open and transparent with other members of the family helping everyone to get on board.”

Another point to consider is how any financial arrangements made between parents and children may impact on wills and who is entrusted the role of the Enduring Power of Attorney (EPOA). According to Herd it’s often unwise to have the son or daughter you’re living with as your EPOA.

Retirement lawyer Richard McCullough echoed Herd’s views, stating how important it is to consider if moving into a granny flat will impact pension allowances and other government benefits.

“If you’re a pensioner you need to think very carefully if what you’re proposing will be a financial asset thereby diminishing your pension,” he told Starts at 60. “If you are a pensioner, what you’re doing may or may not trigger the asset test or income test. You need to ascertain that to avoid nasty surprises.”

He added that it would be helpful to set up what’s known as granny flat interest, where you pay a certain amount for the right to live in a specific home for life. A granny flat interest payment typically ensures your pension won’t be affected and often comes with the proviso that you will be provided with care and support while living there.

The legally-recognised payment can be made a number of ways. The most common are paying for the construction of a separate dwelling on a property owned by your child, financing renovations or extensions to an existing property where you will live, or selling your own home and buying a new house for you and your child to live in.

“While [a granny flat interest payment] won’t affect your pension, it has to be done very carefully,” McCullough explained. “Even though your pension may be preserved, if you want to or have to move out there can be difficulties getting your money out.

“If your child is mortgaged to the hilt, they may not be able to remortgage and you could potentially be left high and dry.”

Would you consider moving in with your children?

 

Think a granny flat might be the best thing for you or your loved ones? 

Call the experts, we’ll help you to make it happen!

 

Sonia Woolley

0403 309 136

Looking at options to house parents or family members? Confused by which rules might apply to your situation?  Have a read below…

Using Centrelink’s ‘granny flat’ rules to house ageing parents

George Cochrane, The Sydney Morning Herald

5 August 2018

I have a house that is currently rented out and we plan to move there in two years. Neither of my parents have superannuation and we have invited them to live with us. They will be selling their home, which would give them about $350,000 profit. They hope to give us $200,000 to be used to renovate or rebuild so they can be accommodated. They are aware of the rules of gifting and their aim is to contribute without affecting their pensions. They are aged 66 and 75. T.M.

You might find Centrelink’s “granny flat rules” helpful as they allow pensioners to contribute more than the usual gifting limits of $10,000 a year and up to $30,000 over a five-year period.

In a nutshell, those gifting rules do not apply if a person, or a couple, transfer the title of their home to someone else, or buy a property in another person’s name, or pay to build a flat or addition onto another person’s property and, in return, receive a life interest or a life tenancy in that property, which will be the donor’s principal residence. The rules are not concerned with age or family relationship.

However, when extra amounts over the cost of transfer or construction are transferred, Centrelink applies a “reasonableness test”, which permits the maximum amount that can be transferred, covering both the transfer cost plus the additional amount.

This “reasonable value” is found by multiplying the maximum annual couples’ pension (currently $35,573.30 until indexed up in September 2019), even if a single person is involved, multiplied by a conversion factor (which you can Google).

For example, if you moved into your parents’ house, and they transferred the title of their house (which means you would pay stamp duty) in exchange for a life interest in the house, with no additional assets, no amount is treated as a gift. Note however, that the deprivation rules might apply if they leave within five years and the reason they left could have been anticipated.

But if they contribute $350,000 to build a self-contained flat on your home and pay, say, another $100,000 cash on top in exchange for a life tenancy in the unit, then the “reasonableness test” is triggered. If we assume the youngest parent’s next birthday is 67, the conversion factor is 19.8, which results in a reasonable value of ($35,573.20 x 19.8 =) $704,349. In this case the reasonable value is not exceeded.

Your parents, as pensioners, might pay for more than one life interest (if you have siblings) and, if the total amount paid is no more than the reasonableness test amount, no amount is treated as a gift.

It gets more complex when deciding whether a person (or a couple) in a granny flat is a homeowner or not, for the purposes of the assets test. If the price paid (the “entry contribution”) is greater than the difference between the age pension’s homeowners’ and non-homeowners’ assets test thresholds (currently $207,000 and known as the “extra allowable amount”) then the granny flat residents are homeowners, otherwise they are treated as non-homeowners.

Tell your parents to make an appointment with a Financial Investment Service to discuss how they can best use the granny flat rules.

Needing further advice about your Granny Flat project?

 

Call Sonia Woolley

0403 309 136

The days are lasting a little longer and the sun is shining a little brighter … Springtime is on its way.  There’s no better time than now to list your goals for the next few months, and review your investments to ensure they are set up to work in the best possible way for you.

If you’re aiming to buy your dream home or a new investment property, then your first step is to talk to your mortgage broker.  And here’s what you need to ask them …

 

Top 8 Questions To Ask Your Mortgage Broker

Australian Property Investor

January 2018

So you’re thinking of buying your dream home or a new investment property, and you wonder how much you can borrow, what the best interest rate is, should you get fix rate or not…

Well, there is a lot more you need to consider. Some people get advice from mortgage brokers and lenders who ‘omit’ to tell them of key facts or potential risks and opportunities about their loans. Or they thought they had got the lowest rate but when that wasn’t actually the best option for their unique circumstance. We hear many stories, after the fact.

To help you assess your options and your mortgage specialist, I’ve listed below the 8 top questions you should ask and shouldn’t ask your mortgage broker before buying a property.

 

First, What NOT To Ask

“What’s the lowest rate I can get?” We have had a lot of enquiries this year from investors as well as home buyers.  While interest rates are one indicator of a better loan, they can sometimes be deceiving. Most people don’t realise that loans with the lowest interest rate can sometimes cost you more.  A loan with the lowest rate will not always have the right conditions and in the long run, this can make the loan more expensive than you may realise. And a ‘cheap loan’ usually comes with fewer features including restricted access to your equity, which can potentially hinder your investment returns and cost you more in lost opportunity than you stand to save. So steer your focus away from just the interest rate digits.

So now, here are the top 7 questions you should be asking your mortgage broker or the bank manager.

 

Questions To Ask Your Mortgage Broker

1. The number one question you should ask a mortgage broker is “how can you help me”?
2. What’s your role as my broker? What type of service will you provide and what will you do for you me?
3. What strategies have you got to help me grow my property portfolio? (Even if you’re buying your first home, a good mortgage broker will show you what and how to get prepared.)
4. Can you explain all the costs associated with buying a property and possible loan features?
5. What are the benefits and restrictions of any loans recommended including penalties for an early exit?
6. Is the loan product an introductory offer? If so, will or when will this interest rate discount expire?
7. How will the recommended loan product/structure suit and improve my situation and my specific goals?

In fact, a good mortgage broker should be asking YOU a lot of questions to better understand your objectives and your reasons for buying a property.  A mortgage broker should not only be clicking a few forms or offering you another loan with a better interest rate.

An experienced mortgage broker should be:

Taking the time to understand your objectives, your current situation, your lifestyle as well as your future dreams and goals;

Keeping your best interests at heart and delivering a customised finance solution based on their experience, as well as an intimate understanding of policies and products; and

Ultimately, coming up with a strategy to MAXIMISE your long-term financial success.

If your mortgage broker isn’t taking the time to consider the above, stay away – as it’s more likely than not that they won’t be advising you of the best option for your circumstances.

Also as mentioned, you need to look further than the interest rate figure. Whilst it might be tempting to go for another loan with a lower rate, watch out for fees such as:

set up costs or annual fees; penalties when you exit your current loan or early exit conditions on the new loan; and interest savings you are missing out on because you don’t have features such as an offset account.

 

Home Loan Refinancing Example

Let’s use refinance as an example. If you’re thinking of refinancing to a lower rate, did you know that you might actually end up paying more because of LMI?

If you refinance your loan and it’s greater than 80% of your home’s value, you might be charged LMI – that means some borrowers will end up paying LMI twice!  Mortgage insurance applies even if you refinance from one bank to another bank.

Therefore, you might save $30 a month on interest but if it’s going to cost you $5,000 to $6,000 for mortgage insurance, this means that over a five year period for the cost of refinancing is now an extra $1,000 per year that you have to pay back on top of your loan, PLUS interest of the WHOLE TERM OF YOUR LOAN (most car loans are 5 years).

On the other hand, if you’re refinancing to consolidate your debt, you might still be better off, even if you do pay LMI.  Say for example you have a home loan, two car loans and a credit card.

If a lender offers to refinance your loans by lowering your car loan and credit card interest rates to a home loan interest rate, it might work out that the amount you save on interest does in fact outweigh the amount of LMI you would need to pay.

But if you’re only refinancing a $20k car loan and a $10k credit card, you would really need to weigh up whether your interest savings are worthwhile enough for you to wear the extra cost of $6,000 for LMI.  You might decide that you’re better off instead paying extra repayments and paying down your mortgage.

A good mortgage broker will do the calculations for you to see if you actually come out on top when refinancing.  They will also make sure that you get a revised valuation done on your home (and, if applicable, any other properties that you own) to try to get you the most competitive rate possible without being out of pocket for LMI.  They will also prompt you to look at all options before considering refinancing.

What it really comes down to is that it shouldn’t be you asking the questions when refinancing. If a broker is experienced and knows what he/she is doing, THEY should be able to ask questions directed at finding out your objectives and goals.

 

Summary

The real value of getting your finance through a mortgage broker is the ability to speak with an experienced professional who can recommend the right loan product and strategy that is customised to your situation.

Therefore, it’s important you work with a mortgage broker who is interested in finding out the purpose behind your financing.

Your purpose for financing can make all the difference in determining the best structure for your loan.

So stop making the mistake of asking for the lowest interest rate and start asking “how can you help me?” And make sure your mortgage broker is actually delivering a customised loan solution that maximises your long-term financial success.

 

Here at Vision Property Group, we are very fortunate to have an experienced and reputable mortgage broker available to assist our clients.  If you have any queries regarding your lending needs, we can happily put you touch.

 

Give Sonia a call for further details …

0403 309 136

The great Aussie dream of owning a big home with a backyard large enough for a cricket pitch is rapidly moving out of reach for many, both young and old.  So sometimes it’s best to follow your “crazy idea” and think outside the square a little…

How a crazy idea led Fred Schultz to build and live in a tiny house

Han Nguyen

The Canberra Times, 28 June 2018

 

Fred Schultz was 50 when he came up with a “crazy idea” of building and living in his own tiny house.

Mr Schultz, now 58, said at the time he was working as a counsellor and realised he wanted a lifestyle change that would “radically reduce my cost and what I get is my time back”.

“Tiny houses are fantastic options for many people – they can offer a way for young people to get debt free fast, or provide affordable and independent options for older people to be close to family,” Mr Schultz said.

“I certainly learned a lot about myself, about relationships, about design, and the details of building and living in a tiny house when I decided to do this.”

After slowly learning how to build a tiny house, Mr Schultz, with the help of his wife Shannon, started building their home in 2013, and by 2015 had moved in.

“When Shannon and I met it became not just some crazy idea that a single man dreamed of doing, but she got on board and we built it.

“When we had our daughter, she learned to walk while we were in the tiny house and it was fun living all together as a family, but don’t get me wrong, it had its challenges too.”

Mr Schultz said a tiny house on wheels with a bed, kitchen, and bathroom could cost “as little as $30,000”.

This weekend, Mr Schultz will run a series of workshops at Ainslie Football Club to show people how to build a tiny house.

“The workshop aims to equip people with all the knowledge they need to take on a do-it-yourself build, saving participants years of research,” he said.

“We want to show people that they can have their own tiny house and not have to be paying so much in mortgage or rent so it can change a person’s monthly budget in a way that’s dramatic.”

Planning minister Mick Gentleman will be at the workshop to talk about the planning issues around tiny houses.

“The ACT government is currently undertaking the housing choices project that is looking at the range of housing options available in residential areas and whether they meet the needs of the community,” Mr Gentleman said.

“Housing types such as tiny houses have been put forward by the community as possible options that could be considered as part of this project.”

In terms of planning requirements, Mr Gentleman said if a tiny house was added to a block with an existing house it could be considered a secondary residence.

“These are permitted if they comply with the requirements of the territory plan and in particular, the residential zones development code and the single dwelling housing development code,” he said.

“There are no particular building requirements for tiny homes, as building and other related laws are not concerned with the size of a building, only its purpose and use.”

Mr Gentleman said if a tiny house was classified as a caravan-style dwelling, parked on a residential site, and used regularly then it needed to meet requirements of the Building Act 2004.

Mr Schultz and his family have since moved out of their tiny house into a property that was large enough to house their tiny house, which they now rent out on AirBnB.

A housing strategy by the government will be published later this year.

 

Tiny house, Big house or anything in between…

Let us help you make your “crazy dream” come to life too!

 

Call Sonia today

 0403 309 136