Tis the season to reconsider holiday home liabilities


Peter Bembrick

The fast-approaching Christmas holiday season is a good time for property investors to reassess their capital gains tax (CGT) obligations and associated cost base – and in particular, whether a holiday house is a wise investment at all, according to HLB Mann Judd Sydney tax partner, Peter Bembrick.

“While holiday homes are very popular at this time of year, families shouldn’t be naïve in overstating their place as a worthwhile investment.

“Holiday homes should be viewed as a lifestyle asset and not one that investors are likely to make a return on in the same way as other investments, such as equities,” he said.

However, he said if investors are intent on purchasing a holiday house, or already own one, CGT considerations are critical and need to be considered right from the moment of purchase.

“One of the most appropriate ways of reducing the amount of CGT incurred is for investors to record non-deductible property costs that can be added to a cost base in reducing the overall CGT.

“On the basis that no expenditure has been claimed as an income tax deduction and that appropriate receipts have been maintained, the cost base of a property is made up of items ranging from the total of any money you have paid to acquire the asset, incidental costs incurred in acquiring or selling the asset, and non-capital costs of ownership (including cleaning, gardening, repairs, insurance, rates, strata levies and land tax),” he said.

Other cost base elements can include capital expenditure incurred by purchasing items intended to increase or preserve the asset’s value or that relates to installing or moving the asset, including capital improvements which may or may not be reflected in the current state of the property, as well as any costs incurred to establish, preserve or defend the owner’s title to the asset.

“All these items should be collectively assessed in determining the best means of mitigating CGT.  If property investors are smart, over the Christmas break when people are using holiday or secondary homes, they should start to think about whether any of these factors could be applied as part of their financial and tax planning strategies, and speak to their professional adviser accordingly,” said Mr Bembrick.

He believes the incidental costs incurred in acquiring or selling the asset, in particular, is an area often overlooked by investors.

“Clients will often be across stamp duty and the costs of transfer, but areas such as advertising or marketing to find a seller or buyer, search fees relating to a CGT asset, conveyancing kits, borrowing expenses and termination fees should all be cited and factored into lowering your overall level of CGT.

“Even professional services sought, both when buying and selling, in the form of surveyors, valuers, auctioneers, accountants, brokers, agents, consultants or legal advisors can all help reduce CGT incurred,” he said.

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