12month CGT discount for constructions

If one buys vacant land and construction takes say 10 months and then I sell the whole thing after 3 months. Is the 50% CGT discount still applicable to both the land and the house?

 

Yes, but is it ordinary income or CGT. Please get formal advice, I may be wrong.

 

This question was asked about the other day. Generally it would be the date that the land was acquired. This is because the house is attached to the land - it is a fixture unable to be sold separately.

 

Second this, what you're describing does not sound like it should be on capital account. Should certainly talk to an accountant.

 

Sorry. I am feeling extra lazy today so didn't bother to do a quick search. You guys are so unbelievably fast and accurate with your responses that I sometimes forget that you are human. Cheers.

 

Wouldn't there be gst involved as its a new product being sold?

 

I thought that only applies if done as a business. If I only do it once (a year or two) then maybe not?

 

And of course the GST issue may also pose a issue. You could end up losing a substantial chunk of profit to GST (and penalties if you are reckless) where if you approached it correctly it may be reduced through margin scheme and claiming GST on build costs. And structuring for the expected profits may be wise too.

The three month occupancy rule applies in situation where a PPOR must be occupied after construction. This rule requires a intention around a PPOR not a profit making venture. If that is a issue it needs personal tax advice as its a high risk. If you are asking this and construction isn't already underway I suspect you aren't eligible.

 

Well said. Intention is fairly obvious if this is the case.

This is a common tax issue that catches out investors. Assuming CGT and then finding out it is ordinary income and GST applies.

It really does pay to sort it out up front and know what you will end up with. The ability to use margin scheme is something you cannot do retrospectively after the sale.

 

No intention of PPOR. IP from start to finish. The 3 months in my example was so that the total is over 12 months to check if CGT discount applies from date of contract on land or date of completion of the build.

Buy land and build a house on it to sell(if the price is right) or rent it out.What makes it ordinary income? Is it the intention to make profit? Or selling too soon? Doing it too often to be considered a business?

 

In the example you quote CGT is generally applied from the date of the land contract. However if you change minds and decide to sell so promptly the ordinary income arguement is a easy target for ATO over the next 4 years. Its a GST audit issue, a income tax issue etc.

Repetitiveness is not a requirement for ordinary income. Mere intent to take profit is enough. Or to repay debt down. (ATO thinks of that as profit too). Ordinary income is old tax law. Before CGT was bought in by Keating for 50 years its how property was taxed. And still is. Its a common law concept rather than a "law" in statute. Basically if you intend to build and make a profit by selling its ordinary income and no CGT. This is different say from a mere realisation of a CGT asset. eg Partners break up and have a spit and go seperate ways. That may well be a CGT issue if they both planned to keep but marriage breakdown etc occurs. Personal advice time I suggest.

It can be very difficult to argue ordinary income does not apply sometimes. And if ordinary income applies to a new build you can bet GST does too. The ordinary income issue has no time test but the longer its rented the better. Changing intenet to take a profit can even be sufficient. GST has a five year issue so take care with that. The GST issue could lead to a tax review. One risk increases the other.

 

Even if not a business, it could still be an enterprise for GST purposes.

An 'enterprise' specifically includes 'an adventure in the nature of a trade'. This is imported from English law due to Australian courts reluctance to infer ordinary income from isolated transactions.

You stated above that the purpose of development was to "Buy land and build a house on it to sell(if the price is right) or rent it out".

So one of the purposes was to buy, develop and sell an asset. This is a sequence of events that could amount to an enterprise, see MT 2006/1 example 15.

Also, you suggested repeating every year or two, which also amounts to a sequence of activities. A history of development will be relevant.

Not so straightforward and requires specific advice.

 

At this point its not uncommon for a post to query that MT2006/1 doesn't directly address GST. Just a ABN. And its a vague and broad view that tries to avoid use of specific terms and entity issues etc. It focussed on "enterprise" rather than business.

GSTD 2006/6 extends the view in MT2006/1 to GST. Its the missing link in the chain.