Eligible for 50% CGT discount?

Discussion in 'Accounting & Tax' started by Gousey, 18th Aug, 2017.

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  1. Gousey

    Gousey Active Member

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    My fiancé bought a block of land in Seven Hills, NSW which settled in December 2012. At the time she didn't have the funds to build on the block and therefore has been holding the empty block of land.

    In October 2014 she had begun the paperwork to build with Masterton Homes, however due to their poor management and communication she decided to not continue with Masterton in early 2015.

    In July 2016 she had signed up with Metricon Homes to build a 4 bedroom single storey house on her block. Construction of the house is now almost complete and will be handed over within the next few weeks.

    She has not claimed a single dollar for any tax deductions since owning the block and has always intended to build this as her PPOR and live in it. There were initial hiccups in the process of building due to her not-so-good experience with Masterton and therefore this had delayed her in continuing her building plans.

    We are currently planning to move in once the house is complete and is handed over - we plan to live in it for at least 6 months to get the 50% CGT discount (6 year rule) is she decides to sell.

    Neither of us currently have a PPOR.

    With no tax claims made against the property, can it be said that the house is a PPOR since being built and therefore she is eligible for the 50% CGT discount?

    Is there a period of expiry before you need to build on a block of land that was purchased for the intention of being a PPOR from the beginning?

    How should she document the information to prove all of the above if required by the ATO?
     
  2. Terry_w

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

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    Ross Forrester likes this.
  3. Hamish Blair

    Hamish Blair Well-Known Member

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    PPOR fully exempt from CGT
     
  4. Terry_w

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

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    Not
    Not always and not in this case.
     
  5. Gousey

    Gousey Active Member

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    Thanks for your input @Terry_w,

    What is the process I need to take to apply for the Commissioners discretion under Section 118-150(4)(a) ITAA 1997?

    What sort of cost should I expect for this?

    Does it matter if I move in before the decision is made by the authority? I assume this wouldn't have an effect on anything.
     
  6. Terry_w

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

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    Just lodge a private ruling application. Seek specific tax advice. Prob cost you $1100 or so
     
  7. Archaon

    Archaon Well-Known Member

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    Is this a deduction also?
     
  8. Terry_w

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

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    I don't see how it related to the production of income?
    Perhaps it could be argued that it is a cost of managing tax affairs.
     
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  9. Paul@PAS

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

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    The cgt mre can backdate in limited circumstanes when a residence is built. Seek advice. A poorly done private ruling appn may not assist. The tax advice relates to exempt income and so any deduction is reduced if favourable to zero
     
  10. Gousey

    Gousey Active Member

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    Just having a look at doing a rough cost analysis for the following situation.
    As described above my fiance's house will be finished in a few weeks. I want to gain a better understanding of how the CGT will be calculated if we rent it out as soon as it is handed over.

    Trying to keep it basic as opposed to complicating it too much. But the general info is:
    -Land was bought for $330,000 in 2012
    -Loan size of $330,000 has been paid down to approx $305,000
    -House build total cost is $330,000 which is on finance from the bank - house will be finished in a few weeks.

    My understanding is that the total capital gain made will be added to my fiance's income for the year before the tax is calculated.
    What value is used as the cost base? Would it be $330,000?
    How does the capital gain get calculated when a house is built on a block of land?

    This will help me understand whether it is beneficial to submit a private ruling application and move in for 6 months to be eligible for the 50% CUT discount or just rent it out right away if there isn't too much of a financial impact from paying CGT.

    Thanks
     
  11. Terry_w

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

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    Loan size is largely irrelevant for CGT. You would have to see if any exemptions apply and then work out the cost base and deduct this from the gain before using the 50% CGT - assuming on capital account.

    Cost base needs to include the build too.
     
  12. Gousey

    Gousey Active Member

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    So does that simply mean the cost base will effectively be the purchase price + build cost?
    I.e. cost base = approx $660,000?
    Therefore if sold for $900,000, the capital gain is $240,000.
    Is this somewhat correct?
     
  13. Terry_w

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

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    Yes plus all the other costs - stamp duty, sales commissions, conveyancing etc.
     
  14. Gousey

    Gousey Active Member

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    Plus those costs? Or minus the costs?
    Also would the interest paid over the time of holding also be taken away from the capital gain?
     
  15. Gousey

    Gousey Active Member

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    Had a brain fart, sorry. It now makes sense that the cost base adds on the other costs. Would be awesome if the interest paid is also part of this.
     
  16. samiam

    samiam Well-Known Member

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    Could you give us an example? Thanks!
     
  17. Terry_w

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

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    if you haven't claimed interest, rates, etc
    Tax Tip 76: Calculating the Cost Base for CGT purposes Tax Tip 76: Calculating the Cost Base for CGT purposes.
     
  18. Terry_w

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

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    A PPOR not exempt from CGT?
    This can happen in many situations
    - larger than 2 hectars
    - income producing
    - didn't move in straight away
    - owned by a trustee
    - owned by a company
    - claiming another property
    c
     
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  19. Paul@PAS

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

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    There is a requirement that to access the main residence exemption for newly constructed property that you move in as soon as practicable after completion AND stay there for at lesat three months. The CGT period also backdates to when the land was acquired UP TO 4 years....

    I believe personal advice may be needed due to so many variables and the 4 year issue with the land too. I dont beleive you understand how CGT is determined and will make a incorrect decision based on flawed numbers. The 50% CGT discount is unrelated to whether you even live in it. If you live in it a 100% exemption may be available.
     

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