Duplex subdivision

I have a few questions about the following scenario:

Block was purchased in 2015 and a dwelling was built in 2016 and subsequently resided in as PPOR after construction was complete.

DA submitted in 2017 and Dwelling was approved to be converted into duplex in same year.

1) Is the cost base for the dwelling considered as the valuation of the property prior to granting of DA OR completion subdivision OR something else?

2) Assuming one duplex was occupied as PPOR and the other one was leased for min 1 year and sold, would the calculation for the profit be:

Sale price
minus Cost base x 50% (assume both are equal)
Times 50% cgt exemption

Also, is land tax applicable on the unit that is being rented out?

Thanks

 

Have you got yourself an accountant?

They would be the best person to go to to work out your cost base and CGT as they will have access to all the numbers.

 

1. Something else
2. Depends.
Land tax needs to be considered

 

The main residence exemption can only apply to the sale of one home.

If you create a duplex you now have two homes. The second home, that is not your main residence is not eligible for the main residence exemption.

The cost base of the asset will be a culmination of costs you incur to hold the asset in its current state.

You should consider the GST implications on the sale of the newly constructed rental property.

You might not be able to claim the 50% CGT exemption in some situations. The asset might actually become trading stock depending on how you went about the activity - and then the cost base calculations of the asset would change as well.

You have undertaken a large and significant business. How you went about the process and your intention during the process will create a significant impact on the tax result and on your cashflow.

 

I would seek personal tax advice.

TD 1992/135 considers that a main residence exemption cant be used where a property is constructed to produce income. Reason - Its not a CGT asset. There are numerous issues of complexity which can only be addressed through personal advice specific to your intentions etc. There appears an intent to produce income as a duplex cannot necessarily be a single dwelling - subdivision or not. This evident intent to produce income /profit etc strongly supports the view an enterprise existing and perhaps GST applies to the first sale of any new property.

I really have to question why you didnt seek advice before commencing - We see heaps of this mistake due to our property focus. The attached developer toolkit explains many of the key concepts and would assist you to gain a basic understanding of the key issues requiring advice.

Now if you are selling you did use the margin scheme ? If not the GST cost may have doubled or more.

 

Thank you all for the replies. I will probably ask someone here for specific advice.

The properties aren't intended to be sold any time soon (in fact the side that is not PPOR will be held for at least 10 years). The PPOR will be resided in for at least a couple of more year until it becomes too small! The intention was to build the dwelling (under a CDC) to be resided in but the potential for a dual occ was considered in the design.

When assessing your intention, do the ATO go into the extent of analyzing your design? For example, if I bought a large land to build my PPOR and I knew that the land had potential for an additional dwelling, I would design my PPOR in a way that would allow the potential of the land to be realised down the track (or for whoever purchases it after me). Is this considered as an intention of making profit?

Thanks.

 

Yes they might look at that. There is one case where they checked on email correspondence, what the owner told council and even lenders.

 

The ATO tend to look at the intent at the time acquired and thereafter. A recent QLD case resulted in a house and land acquired 8 years earlier as part of a possible dev that never proceeded to fail the CGT asset tests. The whole profit was taxable on sale and the owner who resided in it couldnt use the main residence exemption. (There were other issues too!!)

The trouble can be holding persuasive evidence to support your view. All it takes is a simple off the cuff comment in a loan or council application and the ATO will take it literally. One of the best ways to demonstrate no intending to profit is...not selling. Its one of the strongest defences but it takes patience...How long ??? ...Longer the better,

The key issue likely to consider is if any potential sale is contemplated too early it really helps demonstrate profit making as a motivator. But with passage of time its also possible to evidence no such intention.

I had two sisters who built a duplex. One each as their home/s was the initial plan but around the time of completion they both saw less and less benefit and one wanted to sell and other wanted to keep hers as an investment. One moved in and hated it. Other kept her investment. Within 2 years both sold. One exempt - Main residence. Other taxable as a CGT profit. No GST applied as their intentions didnt meet a profit making intention...No enterprise. Ironically the sister who choose to use hers as an investment regretted not moving in as the tax exemption would have been worthwhile v's the income tax benefits of renting. She did admit though that we gave her that advice.....

Tax advice should always save you money even if its means paying - Its means not under or over paying.

 

Thanks once again.

Is it possible to get a private ruling prior to actually making a sale on these properties to avoid surprises after the fact?

 

Yes, there are pros and cons for doing or not doing.

 

When you say con for doing, do you mean putting yourself under the radar rather than just letting it take the nature course and possibly not get reviewed at all?

 

I would seek tax advice. Tax advice is the first step. Conflicting advice and uncertainty with tax law are grounds for seeking rulings. If there is no uncertainty then no ruling is needed. Rulings are only as good as their quality. You leave one key issue out and its useless.

Seeking tax advice can be grounds to limit / avoid penalties if the ATO later think the advice was wrong. I say can be...If you arent honest with the tax adviser they will still hang you up. The system is designed so that people who dont know use qualified, experienced and approved practitioners (tax agents / lawyers) that give advice to assist you to self assess your own tax concerns. The advice is protected by PI so if I get it wrong you can seek damages.

The ATO ruling system is a last resort. 99.99% of issues are dealt with as advice

 

Oh ok that's interesting to know. I didn't know such weight was given to tax advice. Will be in touch. Thanks!

 

That's one aspect to consider!

 

I see you are remote....Watching missiles fly overhead ??