Development profit under main residence exception

Discussion in 'Accounting & Tax' started by purkulator, 20th Jun, 2021.

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  1. purkulator

    purkulator Well-Known Member

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    if the outcome I am trying to achieve is to get the development profit CGT free, would that mean it would only make sense if a development site has an existing dwelling (not vacant land) on it and construction is commenced as soon as possible?

    I am just thinking, in the event that I was to buy a property as PPOR, then convert it to an IP to receive rental income as I do the DA, for the development profit to be CGT free would mean that the IP must be converted back to a PPOR prior to construction. Otherwise the cost base for profit calculation would be after the construction is completed and there is CGT to be paid from the period between it being an IP to selling post development. Is this right?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    And assuming it was on capital account, that is wrong too.
     
  4. purkulator

    purkulator Well-Known Member

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    What if its not a repeated business activity?
    I buy a house as PPOR, live in it, construct, live for 3 months again then sell.
     
  5. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    constuct how many?
    If you just knock down and build one with the intention that the new house is also PPOR then maybe
     
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  6. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    *sarcasm* you can make anything CGT free by:
    1. Not making a profit
    2. Not being a CGT eligible project and being charged income tax instead
     
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  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    There are three ways the issue may be taxed

    1. Isolated profit making....Not a CGT event but under "ordinary income principles"
    2. Business profits - Usually need is profit making plans intentions and system and recurring activities
    3. CGT (Not!!)

    Remember CGT is a "modern tax" introduced in 1985. Prior to this (and still) profit making efforts or intentions are a fundamental basis of taxation of "profits"

    Oh and dont ignore the GST implications

    What is a CGT event ? It is a "mere realisation" of a CGT asset eg You buy VAS ETF units intended to produce income. Eventually you sell for a profit. That is a mere realisation. When you have intentions to produce profit whether that actually produce a profit or not it is more likely to be ordinary income and a element of a enterprise
     
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  8. purkulator

    purkulator Well-Known Member

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    Intend on building 2 and keeping one. But the strategy would be to live in on and sell then move over into the 2nd permanently
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Doesnt change a thing. Not a main residence exemption property. GST still applies too. IMO I would plan to reside in the final and plan on that being private construction. Dont claim that % of GST on costs etc.
     

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  10. craigc

    craigc Well-Known Member

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    @Terry_w @Paul@PFI

    Sorry to query the gurus,

    Wasn’t there a particular example that you both agreed PPOR exemption could apply in a thread a while back? (Ie could be 12 months +).

    I recall it as complex circumstances (original
    PPOR), knockdown & build 2, retain #1 as PPOR for xx period? (Maybe 5 years).
    #2 was IP held after build.

    Important: Agree it doesn’t match OP example here, but I recall a specific example where MR could apply?

    Am I completely off base here? Sorry I can’t recall the thread.

    Thanks gents
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Building and selling can be on capital account. This is clear from the legislation even. Section 118-150 says to get the main residence exemption after constructing the taxpayer would need to live in it for at least 3 months - for the exemption to count before the construction for up to 4 years.
     
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  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    However the principles to the main residence exemption dont always apply. Construction for a isolated profit making purpose means the property is not a CGT asset and so the 3 month rule cant even be used or considered and so there cant even be a exemption. TD 92/135.

    This is a area where obtaining quality property tax advice can save a mint. With the right advice a contentious position can be noted on file and given advice specific to the circumstances and this may assist to address reckless penalties etc if it is later reviewed.

    My general advice to some who builds a new home as part of a dev is to live there and stay there a while. Often longer the better. Its when they then ask "so how soon before I can sell" that it then indicates a different intention.
     
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  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    indeed!

    And using the term 'develop' adds to that
     
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  14. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Our developer video series addresses the very common improper use of names.

    In my mind a developer constructs to SELL for profit but may hold property when market conditions turn on them. This doesnt make them a investor. . The activity of building to keep is not actually development despite the fact the use of the land may redevelop a better use. What is the activity of someone who builds to keep ? A = Investment. I would caution anyone building to keep to be very careful about misrepresenting themselves as a developer in broker, lender, council and other dealings. ATO can use it against you.
     
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  15. purkulator

    purkulator Well-Known Member

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    So as long as you live in it 3 months post construction it qualifies for the residence exemption? Is there other pre requisites?
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    No.

    Yes
     
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  17. purkulator

    purkulator Well-Known Member

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    As long as it is purchased as a residence and lived in for 3 months prior to construction as well?
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The 3 month rule in s 118-150 only applies to properties on capital account - there is no need to live in it prior to construction, just 3 months post construction.
     
  19. purkulator

    purkulator Well-Known Member

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    So what is the pre requisite in addition to living in 3 months post construction? Are you able to to fill me in?
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    have you read my relevant tax tips?