does 50% gst discount apply to new development

Hi

scenario.

purchased IP 4 yrs ago
plan to demolish existing house and build townhouses nxt year

If 1 of the townhouses is sold off the plan/after completion

Will I be eligible to a 50% CGT discount as I have owned the property for 4 years.
OR will 12 months requirement reset from completion of construction of the new townhouse / Cert of Occupancy....

 

Just to.vonfirm, you're asking about CGT and not gst? In that case you'll have to determine if this will be taxed as an enterprise/business transaction which will mean paying income tax (and hence no discount) or if CGT is applicable.

What was the original intention when the properyu was bought 4 years ago and from this point forward what's the intention in terms of the outcome you're looking for? Is this a development project where you'll flog them off (whether OTP or post completion) or are you building primarily to hold and rent out?

Has it been tenanted the last 4 years?

Re the resetting point, one of the qualified folks on here CA. Confirm but I believe the 12 month timeline would be from titles being created once project completed but make sure you get some tax advice and obtain licenced Val's to document certain key points, eg when you knock the house down and begin construction

 

Sounds like your might be going from holding the asset on capital account to that on revenue account. This could trigger a deemed disposal and CGT payable before selling (with options to delay it).

You need some professional advice.

If capital account the 50% applies from the date purchased (contract dates).

 

purchased as long term investment and have rented out since had it. And intention has been and still is to develop and retain and hold all of them long term (unless partial bank loan demands 1 pre sale)

 

I think it would be unlikely the bank would require a presale unless you are doing this as a commercial loan. How many townhouses?

 

Is that correct Terry? If you have a property with one house on it bought in 2015, demolish in say 2018 and build 4 townhouses on there that are completed in 2020, assuming it's on capital account the 4
50% would be 12 months from contract date in 2015? I always thought different

Or have I misinterpreted your post

 

4 townhouses
Don't want to do it as a commercial loan, (MTR mentioned in another post 4 townhouses shouldn't need be a commercial loan), so I'm casting my net wider with banks/brokers.
Further that if I'm funding 50% of the costs required for development and only require 50% loan - in effect bank is funding for 'w townhouses' could I deem this a work around to the so called 4'townhouse development is sometimes....? Deemed commercial....

Excuse my ignorance regarding capital account and revenue accounts.... Could you please elaborate terry...

 

Capital account - 50% CGT discount applies

Revenue account - taxed as ordinary income (no CGT discount)

Depends on your intention. Buying a rental property and selling a few years down the track for a profit likely on capital account as it's a mere realisation of an asset.

Development is a bit harder to prove as there is intention (usually) to make a profit.

Now if you built 4 x townhouses, kept them all and rented out, and sold one in six years time, apart from no GST payable on sale (AFIAK - sale of second hand, not new residential property), it may then be on capital account. Seek tax advice first.

 

Yes that is right - generally.

 

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


Tax Tip 157: Difference on being taxed Capital v Revenue Account Tax Tip 157: Difference on being taxed Capital v Revenue Account

 

Thanks again gents

Seeking tax advice

 

I have doubts about the CGT basis. Selling 1 of 4 still seems an element of a profit making enterprise and a GST trigger on top. Selling to reduce debt is also a way to make profits according to ATO so thats no excuse. And a pre-planned sale of 1 of 4 still seems like a element of a enterprise and not a pure capital account intention.

I'm with Hamish - Time is a better way to demonstrate intentions. If you sell in 4, 5, 6 years for one unit you seem to satisfy a capital gains mere-realisation. But sell all of them then and its less clear.
My greater concern is when planning a dev and someone asks about selling....The best time to discussed CGT profits is years after the build. But then if the parties have demonstrated they are developers that may not even be enough.

 

If you subdivide I'd imagine it could also show an intention to sell. In any event developing 4 townhouses is always going to see you get thoroughly looked over if audited.

 

Subdivision isnt a CGT event. Hence a likely revenue issue but not always. A investor doesnt need to subdivide. The Myer decision is complex and may apply. Why is a subdivision being undertaken ?There are three tax ruling s specific to intent and each adopts a similar view and subdivision forms a element of the profit making intent. Isolated profit making intent

Personally, if ANY property changes are proposed a specific tax plan based on sound advice is essential to avoid a serious tax deficiency

 

I am in a similar situation. I refer you to this guide from BANTACs

http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf

Refer to page 9 for GST considerations.
CGT considerations covered elsewhere.

My understanding is that if any of the townhouses are sold off the plan or prior to completion then you will be taxed as ordinary income on that dwelling and will be required to register for GST and pay GST.

If you rent them for a while and then choose to sell it may be capital in nature. It is possible you will not be required to register for GST.

Regarding CGT, I understand the 12 month period for the 50% discount commences at completion of the dwellings, not from the contract date. At the contract date, the asset does not yet exist.

@Terry_w , I am not a lawyer nor accountant and am keen to know if my understanding is correct.

 

You understanding may be correct in some situations but not in other.

 

There are many assumptions people make and they tend to gravitate to the response that offers the least tax outcome. Failing to get advice can be financially fatal. The timing of when a sale occurs is not a significant issue - whether OTP or soon after completion or even after some time.

One of the key technical issues that DIY problem seeking overlooks is whether a asset is a revenue asset or a CGT asset. In some cases a revenue asset NEVER becomes a CGT asset and so even after 5 years the GST issue may pass but the sale will trigger full tax.

There is a simple (I argue its over simplistic) but concerning tax ruling - TD 1992/135 that highlights the issue of a revenue asset which never becomes a CGT asset when the intentions was to produce a profit. delaying a sale., moving in and claiming a main residence etc all fail.

The very suggestion of the Bantacs article is also a concern - They know what they mean but many readers assume its a case of minor changes and the tax concerns disappear. NO -. A developer seeking to profit cant not be a developer. But they certainly can seek advice and use strategy to defer and minimise taxes. Or not undertake a development !! One of the easier ways is to sell undeveloped house and land with a mere DA perhaps even your own home