21/01/2011
Question: My wife and I are looking at carrying out a $100,000 extension to add three rooms to our home. It’s our intention to set up a business housing foreign students from the local university. One of the rooms plus an ensuite would be used exclusively by students for at least five years. As this room would be used for business, ie generating a rental income, would any part of the building works be tax deductible? Is there a minimum period that we would have to house students if there is any tax break on the building works?
Answer: Using your home to run a business and claiming expenses such as interest will reclassify the home from wholly a main residence to partially a main residence. This means that the capital gains tax exemption on sale available on the main residence will only partially apply (based on floor space as an indication) to the whole property. That means if you sell, only part of the home will be CGT free and part will be taxable.
The building works associated (including council fees, architects, builders, construction costs etc) with the student accommodation will be an allowable investment expenditure. As these works entail substantial modifications, then they are classified as capital in nature and would be depreciated and not expensed in the year of expenditure. You may have some low pool assets which you can claim sooner and we would suggest obtaining a depreciation schedule after work is completed. We would also suggest getting a scrapping schedule prior to any demolition in case some items can be scrapped and written off.
The interest on any borrowed monies used for this would be deductible. Expenses in managing and running the property used by students (ie proportional rates, repairs, electricity etc) would also be deductible. As owing investment properties of a residential nature are not part of the GST regime you will probably not be able to claim any GST on purchases including construction and no GST would be payable on rents received.
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Chan & Naylor is an accountancy firm that specialises in the areas of asset protection, wealth creation through property investing, estate planning and tax planning. The company ranks in BRW’s top 100 accountancy firms in Australia. For more information, phone (02) 9391 5400 or visit www.chan-naylor.com.au. The advice contained in this report is general in nature and its preparation has not taken any individual circumstances, objectives or financial needs into account. Readers are advised to seek appropriate advice from licensed professionals before embarking on any investments.
