Consider your liabilities BEFORE accepting a purchase price
It may seem obvious, but if you are selling a property, you need to consider a number of fiscal issues such as Land Tax, CGT, GST and mortgage costs before accepting an offer by a prospective purchaser.The figure you think sounds acceptable in the heat of the negotiations, may not actually be enough!
The purchase price you accept for a property should always be adequate to cover all of the costs associated with the sale, as well as any liabilities you may have incurred in connection with the property. These additional costs, in many instances, are not limited to just the sales agent's commission and solicitor or conveyancer's fees. All too often, Vendors accept a figure in the hope of a quick sale, only to find that they face hidden fees, charges and taxation costs they were unaware of.
Some of those other liabilities include:
Before placing a property on the market for sale, you should always check with your lender/mortgagee what the amount of the debt owing against the property is, together with any other fees or charges that may apply upon discharge of your mortgage.
There are a number of potential traps that a Vendor may fall into if they have not checked the amount that will be required to discharge their mortgage. These include:
- If there is more than one property held as security, and only a partial mortgage discharge is required, the valuation of the property that is to remain as security may not be at a value the Vendor had thought. This is particularly common because the banks tend to value properties for their own purposes and it is often different to the market value. This valuation discrepancy may result in the bank requiring a higher payout figure on the property being sold.
- Break costs may be incurred if a fixed rate applies to the loan or mortgage at the time it is to be discharged. In some cases, these break costs can be quite high - as a number of borrowers discovered in recent years when interest rates dropped significantly.
- A range of other fees (including exit fees) may apply to the loan that the Vendor has not factored into their pay-out calculations.
In some instances, Land Tax will be payable on a property that is being sold. For example, you may be liable to pay Land Tax if:
- you own a property for investment purposes that has an unimproved land value above the threshold for any given Land Tax year.
- you have used your residence (or any part of it) for the purpose of running a home business and/or generated income from your residence by, for example, renting a granny flat that forms part of your residence.
- you have not lodged an initial return at the Office of State Revenue and the property being sold is NOT your principal place of residence.
Usually, Land Tax is assessed annually as at midnight on 31 December each year and it is the land owner's responsibility to ensure that they have lodged their land tax return. It is a charge against the land (not the owner), so during the purchase transaction a Purchaser will make enquiries at the Office of State Revenue. If a charge is noted against the land, the Purchaser will require all Land Tax to be paid on or before completion of a Contract.
If a Land Tax liability is not known prior to the property being sold, it can cause significant issues during the sale transaction. Not only will the Land Tax charges have to be deducted from the balance of purchase price, it can also cause delays in completion of the sale.
Further information about land tax liability can be found at the Office of State Revenue website at www.osr.nsw.gov.au.
Capital Gains Tax (CGT)
CGT may apply if you sell or dispose of a property you acquired on or after 20 September 1985, UNLESS you are eligible for an exemption (for example, a main residence or small business exemption).
It may also apply to land if you have constructed improvements that would attract capital gains on the land after that date (despite having owned the land prior to 20 September 1985).
The liability date for CGT is the date you enter into the Contract (that is, the date of exchange of Contracts). Thus, if you exchanged contracts before 30 June 2012 but settlement did not occur until August 2012, your CGT liability would need to be assessed with your 2011/12 income.
CGT is based on the market value of the property. Regardless of whether you intend, for example, to transfer the property to a family member for zero consideration, CGT will still apply and be based on the market value of the property.
To reduce your CGT liability, you may take into account:
- the purchase price that you acquired the property for;
- stamp duty;
- legal costs;
- real estate commission;
- cost of certain capital improvements;
- costs incurred to establish, preserve or defend your right and/or estate to title (if applicable); and
- if after 20 August 1991, you have non-capital costs (eg, rates payment and interest) and you have not already claimed a tax deduction for them, you may be eligible to include these in the cost base of the property.
Note: Generally, the main residence exemption would only apply if the property was your main residence for the whole period you owned it, was not used to produce assessable income, and the land on which the dwelling is situated is two hectares or less.
Goods and Services Tax (GST)
Another issue to be aware of before agreeing to a purchase price is your GST status and/or liability. If for example your Contract does not provide for GST to be added on top of the purchase price, and you are liable for GST, you may be left with having to deduct 1/11th of the purchase price to pay your GST liability.
The lesson to be learned from all of these potential traps, is to do your research whenever you are selling property. As a Vendor, you should make sure that you are fully aware of all of your liabilities before placing a property up for sale. If you are unsure about your GST status, CGT or any other potential liability, speak to your Coleman Greig solicitor or conveyancer when you request a Contract of Sale. A little time spent doing your research can ensure there are no nasty surprises during the transaction!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.