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The Impact of Changes On Tenants

Adding a minor dwelling to an existing rental property needs careful consideration and consultation.

By: Matthew Gilligan

1 November 2022

Q

I’m considering adding a minor dwelling to my investment property to increase my income (to offset the rising mortgage costs). The existing dwelling on the property has long-term tenants in it, they’re good tenants and I don’t want to lose them. Their tenancy would be affected by the addition of a minor dwelling, not just in terms of the disturbance from the construction but also the driveway will become shared, and they will have a smaller backyard. I expect they will choose to stay because they don’t get any use out of the area where the minor dwelling will go. If the tenants want to stay, how do I go about altering their tenancy agreement to reflect that the site/property will change (get smaller) and their rent will reduce?

A

If you are able to add a minor dwelling to your existing property, then this is a great strategy to increase the property’s income potential. You haven’t said what type of tenancy agreement the present tenants are on, other than they have been good long-term tenants. Adding a minor dwelling to the section will have a substantial impact on the tenants. Not only will they have less access and less use of the section, but you can also expect substantial disruption to the tenants during the time it takes to construct the minor dwelling. Don’t forget, as well, the disruption and mess caused by adding services, drains, underground power, driveways, etc. Unless you are prepared to wait for the tenancy to end or negotiate an end to the tenancy with the existing tenants you are going to need their agreement to add the minor dwelling. Once you know exactly what sort of dwelling you want to construct and the impact it will have on the existing site, approach the tenants to discuss your plans. Make sure you have “all your ducks in a row” so you can honestly answer any questions. Be realistic with time expectations to complete the project and the impact it will probably have on them during the construction and then once the minor dwelling is completed and tenanted. Be prepared to discuss what you will do for them to mitigate the negative impact on their tenancy. Once you have their agreement, I would suggest you sign a new tenancy agreement with the tenants before work begins. To avoid any problems, it is a good idea to attach your architect’s design to the tenancy agreement as this will show precisely how their site will be affected/reduced. You should undertake a rent appraisal of the property based on the reduced site and set the rent at that level in the new tenancy agreement. I also suggest you add a clause to their tenancy agreement along the following lines: “The Tenant acknowledges that the Landlord has informed the Tenant that a minor dwelling is intended to be constructed on the Tenancy Site and the Tenant agrees to this taking place during the term of the lease. The Landlord
acknowledges that this may be an inconvenience to the Tenant while the building work is completed. The Landlord agrees to compensate the Tenant during this period. The compensation will be paid by way of rent reduction and the rent will be reduced and recorded by way of separate email starting from the date of commencement of construction and ending on the date that the Landlord gives the Tenant notice of the completion of construction and the rent will return to the original rent figure, on the next rent payment one week after the Tenant’s receipt of the notice.” This clause is copyright IP from the Tenancy Practice Service Limited clause library. - Ryan Weir

Q

A few properties near me are selling +GST. Can you give a quick refresher on how GST works for property sales?

A

When a property is marketed plus GST if any it generally signals the vendor is GST registered and the property is subject to their taxable activity. If a contract is drawn up plus GST 15 per cent, GST will be added to the strike price on settlement for the GST the vendor charges. This does not prevent a buyer making an offer “inclusive of GST”. If this offer is accepted by the vendor the vendor must pay the GST from the settlement proceeds. The schedule 1 GST warranty section of the agreement should always be completed by both parties when there is GST involved in the transaction. Remember that when both parties are GST registered and the buyer warrants that they will use the property in their own taxable activity and that the property will not be their primary place of residence, the contract meets the
requirements for compulsory zero rating. This means GST is charged at the rate of zero even where the contract is inclusive of GST. This leaves the buyer with no
GST to claim as none has been charged by the vendor. - Mark Withers

‘Don’t forget the disruption and mess caused by adding drains, underground power and driveways’ RYAN WEIR

Q

When is a new build a new build? I understand that new builds keep their interest deductibility exemption for 20 years even if you sell it. Is that the same for bright-line?

A

The key term from a tax point of view is “new build land”. This is defined as land that has a self-contained residential dwelling on it where CCC (code compliance certificate) evidencing the addition of the dwelling to the land, or conversion of it into a residence, has been issued on or after March 27, 2020. There are then different factors that come into consideration depending on whether you are looking at the interest deductibility rules or the bright-line rules. If looking at the interest deductibility rules, then interest is deductible on money borrowed in relation to new build land for a period of 20 years from the issue of CCC. This ability to claim interest deductions can pass on to subsequent owners until the 20 years has expired. On the other hand, the reduction of the 10-year bright-line period down to five years is only applicable if you acquire the new build land before 12 months have passed from the issue of CCC. This means you either need to have placed the dwelling on your land yourself (in which case you clearly acquired it before 12 months has passed since issue of CCC) or bought it within 12 months of
the CCC being issued after someone else has built it. - Matthew Gilligan

Q

What cash-backs and interest rate discounts are you seeing at the moment? My interest rate is coming up for renewal and I am trying to understand what a good bank incentive is.

A

Presently I am finding the New Zealand banks are actually being more aggressive with pricing in regard to interest rate discounts than the Australian bank offerings. This can be seen with one of the New Zealand banks advertising that they will beat any rate offering by one of the Australian banks. In regard to cash contributions we are still often seeing cash given up to one per cent of the loan amount. - Kris Pedersen

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