Capital Gains Tax changes under Labour and effects on new builds

Hi,

We have an IP on which we intend to build 2 units. This IP was acquired in January, 1986 and used as a rental all this time. As the house requires a lot of maintenance , we have decided to build 2 new units and will keep for rental.

I understand that the current house is subject to the current CGT regime of 50%, upon sale. These units will be used for rental but if these units units ever get sold will they be under the CGT of 50% or the new CGT of 25% ?

What will it depend as to whether CGT of 50% or CGT of 25% applies?

 

I think we'll need to wait until Labor is in government and actually changes to the law to see what the actual implementation is. All they've done so far is suggest an outline of what they want to do, the final details have yet to be revealed.

 

The policy is a mere mention on a website :

Capital gains tax

Labor will halve the capital gains discount for all assets purchased after a yet-to-be-determined date after the next election. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.

All investments made before this date will not be affected by this change and will be fully grandfathered.

This policy change will also not affect investments made by superannuation funds. The CGT discount will not change for small business assets. This will ensure that no small businesses are worse off under these changes.

Labor will consult with industry, relevant stakeholders and State governments on further design and implementation details ahead of the start date for both these proposals.

Issues :
- What about newly created assets ? I would suggest they will be impacted and NOT grandfathered. ie a new CGT asset. Tax law would require a re-write and who knows.
- Yet to be determined date ? They could adopt the date the new CGT asset is created - ie project start or it could be based on when project completes (align with GST rules like the land banking tax issues)

The impact of the tax law changes to deny interest and other deductions after 1 July 2019 until the project is completed needs to be understood too.

 

the yet to be determined date could be 1985!

 

Or 1936

 

You can bet your bottom dollar that pre-CGT assets will have trigger points as will pre-grandfathered assets. eg Your home was acquired in 2000 and first produces rent.

While the website refers to the general issues under a heading of property this proposed policy change does not only affect property. Affects all CGT events. All investments.

 

So what happens currentl for new builds on pre capital gains tax land. So if there is a house which was purchased in 1984 , pre CGT and used exclusively for rental . It is now developed and 2 townhouses build and used for rental as well for another 20 years. Will the pre CGT status be lost and if so at what stage does this occur . Is it when at the subdivision stage? the development start? When the occupany certificate is obtained? My understanding is that these new assets will become CGT 50% with todays laws.

 

Yes it will no longer be CGT free. The capital improvement would be taxed as a separate asset.

 

Perhaps - It could be two distinct assets or four: One pre-CGT (tax free - the land) and another post CGT - The building/s. (maybe with 25% discount,, maybe?). Land and buildings are not always a single CGT asset. It could also be subject to trading stock or be a issue concerning an isolated profit making activity - NOT a CGT asset

The general trigger is when an asset ceases to be held for a specific purpose. eg you punt the tenants. At that time it ceases to be producing income.

The land would likely retain its pre-CGT unless you plan to sell after the build (in whole or part) and then at the time it ceases to be held as a CGT asset it may become a element of the build at its market value.

I would be seeking personal tax advice as its not straight fwd. The intentions could mean its no longer a CGT asset and subject to full tax, GST and other issues.