Capital gains tax - 12 month discount method

I have looked at ATO and seeking others interpretation of the 12 month rule re: CGT discount

scenario:

Owned IP block for many years with existing front dwelling.
perform subdivision and build new dwelling at rear.
dwelling has been rented out as IP since building completed last year.
Long term intentions to hold have changed and now plan to sell property.

Is the 12 month date calculated from the date of Certificate of Occupancy permit given.... or date of when first rental income / lease date commenced......

Any other considerations I should keep in mind regarding CGT & selling

Cheers

 

If CGT would apply it would probably be the date you entered the contract to purchase the land.

But with developments it is often just income tax so no CGT and no 50% discount.

If held the land for a while it could be a deemed disposal so you may trigger CGT even without selling.

 

And don't forget the gst payable on the new dwelling that you rented at the back.

If you rented it for less than 5 years it can still be a new dwelling.

 

So when is the sale of a development on capital account, not revenue? What circumstances would indicate this?

 

When you are realising a capital asset.

Tax Tip 143: The sale of a property – Capital or Revenue account? Tax Tip 143: The sale of a property – Capital or Revenue account?

 

Thanks Terry_w makes sense to me. A live issue for me at present having sold 1 of 3 townhouses we finished building.

 

The shorter the ownership period the more it looks like a profit making enterprise.

 

TD 1992/135 also takes the view that if you live in one you develop it also may not be a CGT exempt asset.

 

Hi Hamish,
So the sale of one of your townhouses ended up on revenue or capital account?

 

It can be on both. It can change from one to the other. This is a big mistake made by many accountants that it can only be ever one or the other.

That is why s 118-20 exists in the act.

INCOME TAX ASSESSMENT ACT 1997 - SECT 118.20 Reducing capital gains if amount otherwise assessable

Example: Liz bought some land in 1990, as part of a profit-making scheme. In December 1998 she sells it.

profit from the sale is $40,000 and is included in her assessable income under section 6-5 (about ordinary income).

capital gainfrom the sale of $30,000. It is reduced to zero because it is does not exceed the amount included.

amount included, or the amount of thepartner's share, if the gain exceeds that amount.

 

And there is a concession the ATO allows which can defer when the tax is payable if the ordinary income and CGT amounts occur in different years.

 

I don't suppose the tax man cares about having owned the property / land - for say 5 years,
- with recent completion of development you have no choice but to sell even though you wish to retain it, but the bank wants it sold (ie: apra changing the goal posts in recent years and tightening the lending / servicability criteria's)
- even tho historic cash flows/spending patterns and projected cash flows etc show it as a no brainer to retain - would the tax man factor 'it looks more like' the owners intention was to retain and not sell to make a profit..... or is that more a scenario they'd put back on me and the bank

 

yes that would be a significant factor in their analysis

 

The ATO view is that all the facts must be considered in their entirety. eg Proximity of land to a urban fringe and expected dev , efforts taken after rezoning and so many other factors

The ATO view is that "profit making" includes reduction of debt and no actual profit outcome. So if your bank instructs to sell and you dont actually make a profit its likely still a profit making venture and not a mere realisation. It does more harm than good because banks dont tell ordinary owners to sell unless their venture exposes higher risks. I encountered someone in this position and they had tried to argue they didnt make a profit. Their summary of costs was so diligent it appeared they had undertaken in a systemic manner and ATO felt it was an isolated profit making issue. The fact they fail to produce a profit is not a issue to use in defence. Attempting to produce a profit by commencing the process is more fatal.