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For many of you with children, there will inevitably be a day when you’ll face the decision as to where you would like your children to undertake their tertiary education and whether you will be back in Australia to provide a home for them during their educational pursuits. When it comes to housing matters, the simple solution is to rent an apartment, room or university dormitory for them. Although this option is an easy one, the cost soon mounts and, at the end of the study period, becomes a substantial non-recoverable burden. Here are a few key factors to consider when renting:
A rental requires only an initial small deposit, usually four weeks rent, so the burden is very low.
Rental leases are usually six to 12 months in duration, allowing a very flexible environment and the ability
to make a change if required.
Simple fixed cost, with modest increases throughout the study period.
An additional room or rooms can be taken either at the same location or a different place.
Opportunity to recoup outlay
There is no opportunity at all to recover the rent.
There are no tax implications on renting a property for your child. The expense is not allowed as a tax deduction in Australia.
To purchase a property there is a large initial financial outlay. In most cases finance is available for up to 80 percent of the purchase price, which can significantly reduce the initial out-of-pocket outlay. Regardless, a 20 percent deposit plus an allowance for a percent of Government and Transfer fees means a significant up-front commitment.
If you have purchased a property, then ideally you will want your child to stay at that property. If your child wants to stay somewhere else, it would be a fairly unwelcomed decision. It is possible to rent property out to another person should your child insist on an alternative residential venue, so there still is a reasonable level of flexibility.
The weekly cost of owning the property with a mortgage will vary greatly depending on the type and location of the property and the initial value.
Opportunity to recoup outlay
If you have chosen a decent property in a good area, it’s highly likely the value will rise over the period of study, and the gains would be sufficient to cover most of the weekly ownership costs. If you have selected a better area or allow some additional time for the value to improve, then you may not only fully recover the holding expenses but also the cost of the education.
It is possible to gain substantial tax benefits when having your children live in your property. This can offset tax issues you may have on other Australian property you own or build up as a future tax benefit to offset
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A When you rent out a property in Australia, all expenses incurred in keeping it in a tenantable condition are considered an expense which can be claimed either in full as general maintenance or as a progressive depreciation claim for more substantial items such as stoves and carpets.
If you intend to move back into the property, you can claim all expenses incurred in bringing the property back to a satisfactory condition at the end of the rental period. This includes painting, garden maintenance and general repairs. If possible, initiate all repairs before moving back into the property or within a reasonable period to claim the expenses in full.
The length of your ownership may have a bearing on the amount you can claim. For example, if you recently acquired the property and have rented it for only six months, the total tax deduction may be reduced if it appears the property is being improved substantially from the time it was acquired rather than being maintained over the course of the short rental period. The longer the rental period, the more likely full maintenance expenses will be allowed when the rental period comes to an end.
Expenses to improve the nature of the property – new carpets, kitchen equipment or any structural improvements – aren’t usually considered an expense but allowed as a partial annual write off if there’s rental income. So if the rental ceases so does the tax deduction entitlement, as these items will provide benefit to the owner-occupier in the future. This may allow you to claim any residual amount on old items you replaced, such as a stove. Any unclaimed depreciation will be allowed as a full write off in the year the item was replaced and could amount to a reasonable tax offset in the final year of rental depending on how old the item was. If the items were recently replaced, then only the depreciation allowance for the rental period will be allowed. But this will cease to be a deduction once the property is no longer rented. You’ll also not be able to write off any remaining value unless the item is replaced and scrapped.
I’m often asked if it’s worth doing major repairs prior to moving in. Generally speaking the depreciation write off is not sufficient to warrant the fact that you may prefer to be the first user of the item rather than the tenant. If you have substantial expenses to be incurred during the changeover it’s wise to seek professional advice on the various expenses to determine the tax deduction available to you, prior to the expense being incurred.
Q My property agent has suggested that I spend some money renovating my apartment. Is this a good idea?
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Q Do I require a valuation on my property due to the recent changes in the Australian budget?
A In May 2012 Treasurer Wayne Swan announced a change to the Capital Gains Tax for all non-resident taxpayers, which will mainly affect Australian expatriates and foreigners who own a property in Australia. Under the old rule, anyone who owned a property in Australia and sold it for a profit was liable for Capital Gains Tax. And if they owned this property for more than 12 months, half of this gain was tax free and the other half taxable.
The recent change has proposed that all profits made after May 8, 2012 will no longer be entitled to the half tax-free concession. However, this change only affects profits made after May 8. Any profits made prior to this date will still enjoy the 50 percent discount. To establish your profits up to May 8, its wise to arrange a sworn valuation on your property, which can be used to establish how much of the future gain on sale will enjoy the discount. Here are a few factors to consider when arranging a valuation:
Time of sale If you don’t think you’ll sell the property until you are back residing in Australia, a valuation may not be required as you’ll still enjoy the 50 percent discount on your entire capital gain – including the period you lived out of Australia. This is because only non-resident taxpayers are ineligible for the discount; if you were to return and become a resident taxpayer once more, you would receive the full discount.
Qualifications of the valuer The valuation must be done only by a qualified person and must be in the form of a sworn valuation – not an appraisal letter from a local real estate agent. The Australasian Taxation Services is arranging a bulk discount with valuation groups, so email firstname.lastname@example.org should you need any assistance to ensure a proper valuation at a good price.
True market value Make sure you give your valuer proper instructions. This is not a conservative bank valuation, but rather a true optimistic assessment of the best value the property is considered to be worth. Be sure your valuer understands this as it can make a big difference in your future tax position.
Personally, I wouldn’t rush to arrange a valuation until the final legislation has been passed through Parliament in Australia. The Australasian Taxation Services has made a submission to the Government to try and stop this law from being passed as, logistically, it will be difficult to administer and may have a detrimental effect on foreign investment in Australia. You can view the submission and join the online petition at www.cgtchange.com.