Bob the Builder Hit with Huge Tax Bill

Bob the Builder Hit with Huge Tax Bill.

So what did Bob do ?

Bob found a good block in Sandringham that he could subdivide and build two townhouses on the blocks. Sandringham is going gang busters and with his building skills he can build two amazing townhouses.

So Bob being the creative guy that he is decides what he will do is to build the first townhouse, live in it and while living in it construct the second one. Once the second one is finished he will move out of the first one and into the second one. He will sell the first one for a handsome profit.

He will wait a year and then sell the second one for a handsome profit. All tax free as they were his main residence. STOP.....what you mean neither are tax free ?

Bob finds out later on that he is taxed on all the profits. Bob never factored this into his calculations and not what his mates down at the races told him

 

Just have to ask as i know a few people that have done the above and several times over several years and never paid any tax as far as i know..But i guess when the letter comes from the ATO it's a bit late..

 

willair it's highly concerning when I hear this. to be fair sometimes people tell you they didn't pay any tax but get caught out later on and pay enormous penalties.....funny how that news never gets filtered back

have a read of TD 92/135 Legal Database

agreed you can put anything you want in your return and exclude anything you want. the problem is if it is detected during an audit. penalties of up to 90% can apply. That hurts.

Many people have a four year amendment period and don't even know. If they are a beneficiary of a trust then watch out four years.

disgruntled employees, sour business partners, ex partners, people who are envious....host of reasons people get reported and with the ATO dob in line it's now soo easy.

 

At BBQs you often hear 'but my mate is claiming it'.

You can break the law, until you get caught, you might think it is ok

 

Bob probably also compounded the issue buy building at cost and not charging himself a margin because he figured it was tax free. If he had put his normal 20% builders margin on it, his company would have made some money (and yes paid tax on it) and his cost base for the development would have increased reducing the tax on the development.

 

Is it any different in this situation?

Bart buys an old house and lives in it for 5 years. Then demolishes and subdivides, building a new townhouse on each block.

Bart moves into townhouse A as his PPoR and lives there for a couple of years. Townhouse B is rented out. Bart then decides he likes townhouse B more, sells townhouse A and moves into townhouse B as his new PPoR.

Are there any tax implications on the sale of townhouse A?

 

There are always tax consequences on the sale of a property

 

GST is probably payable on the sale of 'A' if it's 'new land' or CGT will be payable on the sale of 'B' if Bart elects to retain 'A' as the PPOR or ....

 

Also have to consider CGT, income tax and land tax. Just because a place is the main residence doesn't mean it will be exempt from CGT

 

Mike A,thanks for the link as i have no problem paying tax ,i don't how they would get away with it then paying 90 percent you would end up being called 2-Bob..

 

What's the way around this?

Don't sell. Borrow on equity.

 

If you do this and make a profit you pay tax

 

No sale, no tax.

There's no cgt event.

 

Agree if you dont sell then no issue but id say out of the many of these very situations ive seen (probably over 50 by now) about 90% do it for profit reasons

Keeping them as a long term hold in many cases isnt feasible particularly if borrowings are involved.

Most of the gain is made in the intial profit so merely holding to gear just reduces the tax liability. In many cases making it similar. No tax on sale (well eventually you will) but the interest costs on the other side.

For those that do it to purely rent (probably around the remaining 10%) then sure no sale means no tax impact

Unfortunately its not the usual scenario or situation.

 

It can also happen where the builder is not the owner, but their spouse is.

 

Would it make any difference if Bart isn't the builder, and engaged an independent builder for the construction?

 

Yes it could, depending on the circumstances. Even builders can have main residences.

 

If Bart

• renovates a dwelling or builds a dwelling to replace a demolished or destroyed main residence, and

• make a choice to treat the land on which the new dwelling is constructed as his main residence from the time that he last occupied the demolished or destroyed dwelling, and

• there is not more than four years between the time the demolished or destroyed dwelling was last occupied and the time the new dwelling became his main residence, and

• he moved into the dwelling as soon as practicable after it's completion and the dwelling is his main residence for at least three months,

then the old and the new dwellings may be treated as one and the main residence usage of the former will count towards the main residence exemption for the new dwelling and land.

The effect of making that choice is that there is deemed to be an unbroken period of occupancy of a main residence on the land from the time when the first dwelling became his main residence until the new dwelling ceases to be his main residence. The main residence exemption can extend to the land for all of this period.

So for Bart it would seem the sale of Townhouse A would be CGT free.

The answer would be totally different if instead of deciding he liked townhouse B more (he finds out that Townhouse A has @datto next door playing heavy metal at all hours and revving the crap out of his Datsun in the morning before work ) but instead indicated to banks, brokers, etc that the reason he kept it for 5 years was to mitigate GST on sale and the plan was always to move into Townhouse A we go back to the original problem.

 

I didn't realise that Bart and @datto were a thing. Does he cut Bart's grass too?

 

Last i heard they got drunk last night down at rooty hill rsl. They did mention something about where to get some grass.

Business planning on new years eve thats dedication.