Although the issues vary, I want to focus on a few important considerations in respect to Granny Flats and their various tax implications:
Many property investors are now investing in large blocks of land and putting a granny flat at the back of the property. Indeed, not only is this popular for investment properties but also popular for PPR’s (principal places of residences). The main tax issues with Granny Flats that we have come across are as follows:
1. Granny Flats and PPR’s:
If a Granny Flat is built in the backyard of a PPR and then rented out, then the part of the property which relates to the Granny Flat will be taxable in the event of a sale. It is essential that before this occurs that the relevant portion of the land which the Granny Flat sits on is valued so when sold, capital gains can be apportioned between the PPR and the Granny Flat.
2. Granny Flats and GST
We were recently informed by a client that they bought an investment property, built a Granny Flat on the back, sub-divided the property between the two dwellings and then sold both separately. We pointed out to the client that the construction of the Granny Flat constituted a new residential premise and therefore the client was liable for GST on the Granny Flat sale. If this is you, we can claim a credit for the GST on the construction of the Granny Flat and sell the property under the margin scheme as opposed to paying GST on the entire sale price of the dwelling to minimise the GST payable.
3. Granny Flats and Income Tax
In the example above, we also had to inform the client that even though the project lasted more than one year (between contact purchase date and contract sale date) that according to Tax Ruling 92/3 and 92/4, which addresses one off developments, that income tax will be paid at the marginal rate. The capital gains tax discount would not be available because the properties were purchased and developed with the intention or purpose of making a profit.
4. Granny Flats and Capital Gains Tax
If you want to be able to obtain a CGT discount on the sale of the Granny Flat, you must:
- Demonstrate that your intention was to always build and hold the dwelling long term. To be safe, if you continuously rent out the Granny Flat for a period of 5 years, the dwelling will no longer be deemed as a new residential premise under GST regulations
- Be able to prove in the event of a tax audit that you do not run a business which does multiple Granny Flat Developments
The above demonstrates the complexities of dealing with Granny Flat developments and the various tax consequences of not seeking the right advice upfront.
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David Shaw is the CEO of WSC Group: Certified Practising Accountants and Business Advisors, and
was voted Property Tax Specialist of the Year in the Your Investment Property 2013 Readers Choice Awards (as well as runner up in 2012, 2014 & 2015).
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