Negative gearing your holiday home
Licensed Financial Adviser, Max Newnham, answers a number of reader questions regarding superannuation and negative gearing.
Q. I currently own 50 per cent of my parents' residence. The plan has always been to purchase the remaining 50 per cent when they are ready to downsize. The main incentive for buying the property is that it will continue to be utilised as a holiday home by all the family for years to come.
Once the property is 100 per cent owned by me, and my parents have moved out, I plan to make the property available for holiday letting for those times of the year when we will not be using it. This will generate some revenue to help with the cost of ownership, but overall it will be a loss-making enterprise in terms of annual cash flow.
In light of the likely ALP victory in the forthcoming election, and the proposed changes to negative gearing, would it be prudent to have all of the property on my books, prior to the end of the 2019 financial year?
Under this scenario, my parents could remain in-situ, perhaps paying nominal rent until they are ready to move on at some point in the future. Assuming the ALP policy comes to fruition, would this approach ensure that the ability to claim negative gearing on the property was secured?
A. With the ALP policy now only being a future possibility if it is retained as a policy for the next federal election, you certainly do not have to do anything before the end of the financial year. You will, however, need to make sure you meet the existing negative gearing rules that apply to holiday homes.
The expenses that you will be able to claim once you have taken full ownership of the property where your parents are living, and you are commencing have it available for rent, may be limited.
This is because the ATO in assessing what expenses are claimable for a holiday home establish whether it has been genuinely available for rent. According to the relevant ATO publication the “Factors that may indicate a property is not genuinely available for rent include:
- it is advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised
- at your workplace
- by word of mouth
- on restricted social media groups
- outside annual holiday periods when the likelihood of it being rented out is very low
- the location, condition of the property, or accessibility to the property, mean that it is unlikely tenants will seek to rent it
- you place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out – such as
- setting the rent above the rate of comparable properties in the area
- placing a combination of restrictions on renting out the property – such as requiring prospective tenants to provide references for short holiday stays and having conditions like "no children" and "no pets".
- setting the minimum night stay to five but booking Friday-Sunday for personal use
- you refuse to rent out the property to interested people without adequate reasons.”
You should seek professional advice before including a negative gearing loss from the rental activities for this property, once you own it outright, as you plan to “make the property available for holiday letting for those times of the year when we will not be using it”. This I believe could leave you open to having any negative gearing losses challenged by the ATO.
Q. I am currently 57 and have recently retired. My wife will turn 57 later this year, and is currently working part-time.
My superannuation account of $1,116,800 is in accumulation and preserved benefit. It has a current tax-free balance of $193,500 and a taxable balance of $923,300. My wife’s current superannuation account is also in accumulation mode with all the benefits preserved. It has a balance of $555,300, with $27,100 tax free, and $528,200 taxable.
We own our residence mortgage free and do not anticipate moving elsewhere or needing to make any improvements to the house within the next 5 years. We also have approximately $800,000 in financial assets outside super. This will be used to fund our living expenses until we convert our superannuation accounts to pension phase, which will be done when we turn 60 years of age and my wife will have stopped working by then.
We anticipate making further after-tax contributions to our superannuation accounts until converting them to pension phase.
I would like to know what income tax will be payable when I convert my superannuation account to pension phase; and whether it may be beneficial for tax purposes to increase the proportion of my superannuation account balance that is tax-free, by making significant additional after-tax contributions from external funds?
A. If you are 57 you may be able to commence a pension from your superannuation now. Under the superannuation preservation rules, someone can access their superannuation once they have reached preservation age. For someone who was born between July 1, 1961, and June 30, 1962, preservation age is 57. If someone is born between July 1, 1962, and June 30, 1963, their preservation age is 58.
To access superannuation when you are under 60 you must have retired. The definition of retirement with regard to superannuation is someone not intending to work for more than 10 hours a week. As you are not working at all you should, therefore, meet the retirement condition of release and be able to commence a pension immediately.
From what you have said your wife will have a preservation age of 58 which means she can access her superannuation after turning 58 and meets the retirement condition of release if she does this before she turns 60.
If she wants to access her super after turning 60 a condition of release, for someone who is 60 but not yet 65, is that must cease working for one employer. This means if she wanted to access her super and still wanted to work, she would only need to cease working for one employer.
There is no tax payable when a superannuation account is converted to pension phase. The only time that this occurs is if a person opens up a pension account with another superannuation fund, and the assets in their existing accumulation account are sold and capital gains are realised.
Increasing the percentage of tax-free superannuation provides no great benefit unless you plan to commence a pension from your superannuation before you turn 60. A superannuation pension commenced by someone who is under 60, with the pension being paid from taxable superannuation benefits, is taxable but a 15 per cent tax offset is received to decrease the actual tax payable.
You should look at the strategy of making a $100,000 after-tax non-concessional contribution before June 30, 2019, to a new accumulation account, then make a $300,000 non-concessional contribution in July 2019, and then commence a pension immediately from the $400,000.
This would result in you having a superannuation pension account made up almost entirely of tax-free benefits. A pension received by someone under 60 paid from tax-free benefits is not taxable.
There are other benefits from increasing the tax-free percentage of your superannuation. You should seek professional advice before doing anything as there may be reasons why you cannot use the strategy outlined above, and there are extra strategy steps that you can take that will improve your overall tax and financial position.
If you have a question for Max Newnham please email it directly to email@example.com.
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