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Property Renovation - Intentions

Discussion in 'Accounting & Tax' started by Paul@PFI, 29th Jul, 2016.

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  1. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The ATO have a nice gem that is frequently overlooked by many homeowners who seek to renovate their home to enhance value. It is described here :
    Renovating properties | Australian Taxation Office Read down to the section titled Renovation as a Profit Making Activity

    The issue is this. Dave and Mary sell their home to buy a renovator special. Their intention is to profit from the increased value of the renovation and propose to sell it after completion. They move in to their new "home" which they plan to renovate and rebuild and sell for a decent profit. In some cases the couple may do this repeatedly however that isnt a requirement. Dave and Mary consider that the profit is exempt from CGT under the main residence exemption.

    The concern confirmed in the above link is that CGT doesnt apply...Hence no main residence exemption. (Tax Determination 92/135 explains this). Full income tax applies.
    In some cases the extensive renovations may even trigger GST on the sale. Dave and Mary could end up with a substantial tax problem detected after the sale/s. The ATO could argue avoidance & evasion arising from recklessness in seeking advice etc. They may underpay as much as 9% of the sale price plus half the true tax payable. On a $1m property this could be $150K + penalties + interest.

    And hanging onto the property for a year or two doesnt "fix" it. Importantly too the ATO clearly split the concern into two main areas
    1. Intention to profit and
    2. A renovation business.
    So a profit intention doesnt need to have a business like intention. This is the issue many argue about but the concern is two-fold.
     
    Last edited: 29th Jul, 2016
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  2. wylie

    wylie Moderator Staff Member

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    Gee... that would be hard to prove, wouldn't it?

    Who renovates a house without at least partly intending that it will improve the value, and that means they will profit. Is there some sort of time limit to hold to prove you've improved it for your own living requirements, and the profit is a lovely by-product?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think this is specifically targeted, but not limited to, builders.
     
  4. Perthguy

    Perthguy Well-Known Member

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    It depends on how Dave and Mary document their intentions. For example, if they set up a blog - how to make a killing from a flip, or keep a big fat folder with their tax records documenting all their plans and how much money they plan to make...

    I have done it. I bought a PPoR and some time afterwards, I got moved to another location for work, rented it out, renovated, rented again, sold. When I moved in, I had no intention of moving, no intention of renovating and no intention of selling, so I didn't keep any documentation of renovation costs or future value after reno or anything like that. It was all just decisions I made on the spur of the moment, responding to events as they occurred.

    Time held might be a trigger for a closer look. For example, I think I held mine 8 years, so it wasn't looked at.

    If Dave and Mary held for only 12 - 14 months, ATO might think it's worth investigating further. If an audit was triggered, they would look at documentation. Then if the find a folder full of quotes, a detailed budget, project timeline and documentation of estimated value after sale (recent comparables for example), then Dave and Mary might have some explaining to do.

    Equally, they might have had no profit intention, started fixing something and the reno got out of control (it happens), then sold for some entirely innocent reason. In that case, it would be unlikely that documentation would be kept to demonstrate a profit motive.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    what would happen is the ATO would do some preliminary investigations and probably issue Dave and Mary an amended notice of assessment. It would then be up to them to prove that the ATO was wrong and that it was not done as a profit making activity - which may not be easy to do.
     
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