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1 |
Rental property with bank loan secured against principal home
A customer purchases a $200,000 rental property and finances the purchase with a loan from their bank. The bank loan is secured only against their principal home, which is an exempt asset. None of the liability can reduce the value of the rental property.
The assessable value of the rental property is therefore $200,000.
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2 |
Rental property with bank loan secured against another assessable property
A customer purchases a $300,000 rental property and finances the purchase with a loan from their bank. The $300,000 bank loan is secured against their other freehold rental property, which is worth $200,000, and the new rental property.
Loan liability calculation
(Value of secured loan x value of assessable property) divided by (value of new assessable property + value of existing property).
$300,000 x $300,000
($300,000 + $200,000)
The amount of the loan to be deducted as a liability= $180,000
The assessable value of the new rental property
$300,000 - $180,000 = $120,000
Note: the existing rental property now also has a liability (calculated using the same apportionment calculation).
$300,000 x $200,000
($300,000 + $200,000)
The amount of the loan to be deducted as a liability= $120,000
The assessable value of the existing rental property
$200,000 - $120,000 = $80,000
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3 |
Example one of rental property with bank loan secured against principal home and rental property
A customer purchases a $300,000 rental property and finances the purchase with a loan from their bank. The $300,000 bank loan is secured against their principal home, which is an exempt asset (worth $200,000), and the rental property.
Loan liability calculation
(Value of secured loan x value of assessable property) divided by (value of assessable property + value of exempt property).
$300,000 x $300,000
($300,000 + $200,000)
The amount of the loan to be deducted as a liability= $180,000
The assessable value of the rental property
$300,000 - $180,000 = $120,000
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4 |
Example two of rental property with bank loan secured against principal home and rental property
A customer has a principal residence worth $400,000 with an existing loan of $100,000 prior to purchasing a $600,000 rental property. Further finance is sourced with a loan from their bank of $300,000, secured by both properties. The net value of the principal home ($300,000) is used to apportion the loan on the investment property. The value of the assessable property is $600,000 and the net value of the exempt property is $300,000.
Loan liability calculation
(Value of secured loan x value of assessable property) divided by (value of new assessable property + net value of existing property)
$300,000 x $600,000
($600,000 + $300,000)
The amount of the loan to be deducted as a liability= $200,000
The assessable value of the rental property
$600,000 - $200,000 = $400,000
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5 |
A customer's child borrows money for their business, secured against an investment property owned by the customer
A customer's child borrows money for their business, secured against an investment property owned by the customer.
The charge or encumbrance against the investment property is for the benefit of a person other than the customer or their partner.
In this case, the customer's child benefits.
The value of the investment property is not reduced by the amount of the charge.
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6 |
Loan used to purchase land, secured over land and an insurance policy
A customer borrows money to buy a block of land. The lender secures the borrowing by a charge over the land. In addition, the lender secures the borrowing against an insurance policy owned by the customer. The charge over the insurance policy is a collateral security.
A charge or encumbrance for the benefit of a third party, or a collateral security, is sometimes called an excluded security. A collateral security is a secondary agreement, supported by money or property, which is additional to the principal security for the same loan.
The value of the insurance policy is not reduced by the amount of the charge. The value of the block of land is reduced by the value of the charge.
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7 |
A customer has a charge secured against both their farm and principal home
A customer has a charge of $100,000 secured against both their farm and principal home. The value of the farm is $180,000 and the value of the principal home is $60,000. The gross value of the farm and principal home combined is $240,000.
($100,000 X $180,000) divided by $240,000 equals $75,000
This means the net asset value of the farm is $105,000 ($180,000 minus $75,000).
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8 |
Customer solely owns farm property with bank loan secured on property and running a primary production partnership jointly with their child
Customer owns farmland worth $200,000. A mortgage of $50,000 is secured against the land. The customer runs the farm in partnership with their child. The partnership owns plant, stock and machinery to the value of $100,000. The partnership has liabilities of $150,000.
The customer has:
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primary production assets of $250,000 (their own land plus a share of partnership assets), and
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primary production liabilities of $125,000 (encumbrance on land plus share of partnership liabilities)
Aggregation applies so total assets of $250,000 minus total liabilities of $125,000 equals net primary production assets of $125,000.
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9 |
Customer is building a new home on a vacant block
From 1 July 2007, land already owned (outright or mortgaged) by the customer on which they intend to build a new principal home, may be exempt from the assets test once the principal home sale proceeds have been received.
If the customer uses the proceeds of sale to purchase a block of land on which they intend to build a new principal home, the land may be exempt from the assets test for up to 12 or 24 months depending on the date of sale (settlement).
If the partially constructed home is to be assessed as an asset, an estimate of the value of the property is needed from the customer. Issue a MOD R form.
The final payment has been made on a newly constructed home
Once the new construction is completed and the customer moves into the new home, it will become the customer’s principal home. This home may no longer be assessable as an asset. (see Assessing house and curtilage for more information)
Once the new construction is completed and the customer has a ‘certificate of occupancy’ for the new home, it will not be the customer’s principal home. Issue a new MOD R to get updated details, including the new mortgage information and new customer estimated value.
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10 |
Assessment of land already owned by the customer to be used to build a new home
The maximum total asset value that may be exempt is the value of the proceeds of the sale of the old principal home.
Example 1: Sally purchased a block of land for $100,000 before selling the principal home. Sally sold the principal home and received $350,000 on 30 July. Sally used some of the proceeds to pay off the mortgage on the block of land. The balance of the settlement money went into a bank account. Sally intends to use this to build a new principal home on the block of land. In this case, the block of land and the money in the bank account can be exempt from 30 July.
Note: the exempt value of the land and the money in the bank account is the lesser of the amount received for the old house and the amount they will spend on the new one including the land.
Example 2: John has a block of land worth $200,000 with a $100,000 mortgage. John sells the principal home for $300,000 and intends to build on the block of land. John uses $100,000 from the sale proceeds to pay off the mortgage on the land and intends to use the balance of the funds ($200,000) to build a new principal home.
The value of equity in the land and money from the proceeds of the sale is $400,000; this is $100,000 more than the amount received from the sale. An exemption applies only to $300,000 (the amount the principal home sold for). The exemption would apply to the amount paid to pay off the land ($100,000) and the balance of funds from the sale ($200,000). The $100,000 equity previously owned for the land is still an assessable asset as the exemption amount cannot be more than the proceeds from the sale of the old principal home.
Example 3: Henry purchased a block of land for $150,000 before selling the home. Henry sells the principal home for $400,000 and intends to use the entire sale proceeds to build on the land. As Henry already owned the block of land, which was already assessed under the assets test before selling the principal home, the land remains assessable until the build of the new principal home has been completed. Once the new home is complete and any sale proceeds exemption ends, the land can now be considered the principal home.
Note: the customer must uniquely identify the location of any real estate or business site they own or have an interest in.
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