Tax with Max: Living in an investment property

Working out negative gearing arrangements, conducting repairs, considering capital gains tax, contemplating a corporate trustee arrangement and more.

Summary: In a situation where someone wishes to purchase an investment property with their former partner, negative gearing arrangements may be considered. If one owner lives in the property they can pay rent to the other, who can claim negative gearing against income earned. But the resident of the property cannot claim negative gearing. The only exception may be if a family trust is used.

Key take-out: Legally a person cannot own a property and rent it to themselves.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Living in an investment property

I am separated from my partner but we still would like to purchase a property together. Is there any way that I could live in the investment property and still claim negative gearing?

Answer: Legally a person cannot effectively own a property and rent it to themselves. This means if you purchased a property with your former partner and were paying him rent he could claim the negative gearing against his income, but you would not be able to.

The only time an individual can have a negatively geared property that they occupy is when it is owned by another entity such as a company or a family discretionary trust. A company is never worthwhile using due to the extra capital gains tax paid by companies.

If a family trust was used rent could be charged to family members at market rates and any gearing loss could be offset against other income earned by the trust. This is a complex area of income tax law and you should seek professional advice before taking any action.

Repairing a property

We have been living in the UK for the last nine years and have had our house rented out for almost the entire time we have been away. The previous tenants in the house, not the current ones, damaged the toilet in the house. This was not picked up by the agent when the tenants moved out in December last year but we will need a new toilet. Can I claim the new toilet, or at least the cost of its installation, as a tax deduction?

Answer: In a situation where damage to the toilet was done by a landlord’s previous tenants, any costs incurred to fix the damage should be tax-deductible. For a repair to be tax-deductible, in a situation where the item damaged must be replaced, the new asset cannot be regarded as an improvement.

To ensure that the replacement of the toilet can be claimed as a tax deduction against the rental income earned in the 2015 income tax year, a landlord must make sure that the new toilet is of the same or equivalent make and model as the one damaged.

Capital gains tax on inherited assets

You recently stated that for assets purchased after September 19, 1985, the cost for capital gains tax purposes for the person inheriting the asset will be the same as the person who died and originally bought it. This suggests that some CGT is payable in this case. The above appears different to the ATO’s statement that “There is a special rule that allows any capital gain or capital loss made on a post-CGT asset to be disregarded if, when the person dies, an asset they owned passes to a beneficiary.” Can you please explain these apparent differences?

Answer: I did not mean to suggest in the answer that capital gains tax will be payable at the time an asset passes from the deceased to the beneficiary. The main point of the question and answer was to point out the different cost base used by a person that sells an asset they inherited.

At the time the asset passes from either the deceased or their estate to the beneficiary no capital gains tax is payable. Once the beneficiary sells the inherited asset, capital gains tax will be payable then.

Where the asset was purchased pre-September 1985 by the deceased the cost base is the market value of the asset at the date of death of the deceased. If the asset was purchased after the introduction of capital gains tax the cost base used by the beneficiary is the cost paid by the deceased.

Working out salary sacrifice arrangements

I am 67 years of age, still working and earning an average of $1600 per fortnight gross. From what I have read I am able to salary sacrifice up to $50,000 per year. At my age I have been led to believe I can draw from my super if I wish. Can I sacrifice my pay to super and then draw from it as an income? Would that save on tax?

Answer: To be able to access superannuation a person must meet a condition of release. A general condition of release is reaching age 65. This means that as you are over 65 you can access your superannuation either as a lump sum or as an account-based pension.

If you earn $1600 per fortnight your annual salary income will be approximately $42,000 a year. A well-used strategy for people in your situation is to start an account-based pension from their superannuation fund and sacrifice the excess salary (as they now receive a tax-free income from the superannuation fund) as extra superannuation contributions.

The maximum concessional superannuation contribution for you in fiscal 2015 is actually $35,000 and not $50,000. You should seek professional advice before using this strategy as it would not make sense for you to sacrifice up to the maximum limit. This would result in the 15% superannuation contributions tax being paid, while if you had received the salary you can earn approximately $21,000 a year and not pay any income tax.

Considering a corporate trustee arrangement

We have a self-managed super fund – my wife and I are the members and trustees. The fund is in pension mode and the account-based pensions are reversionary. We are contemplating changing to a corporate trustee arrangement. Does this have to be done before January 1, 2015 when the superannuation changes come in? Does changing the trustee structure to a corporate trustee result in a change in circumstances of the fund? Are there any other implications to making this change and is it worthwhile doing this?

Answer: As far as I know there are no superannuation changes that will come into effect from January 1, 2015. On that date there will be a change in the way that superannuation pensions are counted by Centrelink. There is no other change related to income tax or superannuation other than this.

Under the change occurring on January 1, 2015 Centrelink will include a deemed income amount, rather than the current adjusted superannuation pension received amount. The changes will not apply to anyone receiving a superannuation pension at December 31, 2014 who was also receiving Centrelink income benefits such as the age pension.

Changing the trustee of a superannuation fund from individuals to a corporate trustee does not have an effect on any pensions that may be being paid at the time of the change. Changing to a corporate trustee will, however, require the trustees of the fund to amend the name that the assets of the super fund are held in to that of the corporate trustee.

The major benefit of changing to a corporate trustee now will be that in the event of the death of either you or your wife no further action needs to be taken. If you were to remain as individual trustees you must appoint a company to act as trustee or find someone else who can act as an individual trustee. In either of these circumstances the ownership of the assets of the superannuation fund would need to be updated at that time.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au

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