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Tax implications for PPOR sub-division

Discussion in 'Accounting & Tax' started by ppnuwan, 27th Sep, 2016.

  1. ppnuwan

    ppnuwan Active Member

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    Few answers in the forum for similar situations but not exactly applicable to mine hence creating new thread with few options (which may be useful for many baby developers out there).

    My situation:
    1) I and my wife together bought our PPOR (700 m2 corner block with an old house coded R20) in 2014 (suburb - Forrestfield WA). This is our very first home.

    2) Within next few months our block is supposed to get R20/30 dual density approved which allows us to sub divide the property (but council has two conditions i- We must demolish existing house, ii - We can't sell sub-divided lands without building).

    3) I have few options here,

    a) Sub-divide and build two houses and sell both without living in any of them

    b) Sub-divide and build two houses, live in one of them for 6 months-1 year time and move to second house and sell the first

    c) Sub-divide and build two houses, live in one of them for 6 months-1 year time and move to second house and sell the first and live in the second house and live same length of time and sell that too

    d) Sell the property without sub dividing​

    Could you please clarify how would 'income tax' be implemented for above options?
    Also Tax exemption for PPOR is only for first PPOR or is it applicable for any PPOR as long as you live in it for more than 6 months?

    Thanks guys...
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Too complex - you need to get some proper advice, (and pay!).

    a) income tax, unlikely 50% CGT reduction. GST too.

    b) could possibly sell the first one without CGT - but depends on a lot

    c) CGT on the second house

    d) Possibly CGT exempt.


    PPOR can be exempt from CGT if lived in from the date of purchase. If you demolish a house you could lose the main residence exemption so get some proper advice.
     
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  3. ppnuwan

    ppnuwan Active Member

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    Thanks a lot for your prompt reply mate.. Yep, I will definitely get some paid advise but would like to have a rough understanding beforehand.. Thanks again.
     
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  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Start point = Developer toolkit
    Then using knowledge seek advice specific to your plans and ideas.

    Note that technically you cant subdivide and sell your PPOR since it wouldnt then be a PPOR would it ? That tax issue needs to be appreciated as it is the key concern.

    Key tax issues:
    • CGT / Insome tax
    • Land tax
    • GST on sale
    • Margin scheme on sale to enhance profit
    • GST on costs
    • Apportioning costs
    • Valuation issues
    • Timing and event triggers
     

    Attached Files:

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  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    d) may well be a way to limit tax. Maybe. B and C have problems - Building to produce profitable outcomes means neither property can be a main residence and exempt from CGT !!!
     
  6. ppnuwan

    ppnuwan Active Member

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    Thanks for the toolkit.. Will take my time to go through that as well.. appreciate your sharing..

    Regarding PPOR issue,
    If I demolish the existing house then build two new dwellings, then what stops me having one of them as my PPOR (as I am going to live there as my primary place from then onward).
    And the second dwelling would be an investment property (from which I won't be getting tax exemption due to that being an investment from the first day)
    However once I sell the first dwelling (which is my PPOR at the time) then the second dwelling (which was initially my investment property) then becomes my PPOR. Will this not be the case?

    Selling the first house could be due to profit or due to something else (such as it been too small or change of mind or something). In fact having to pay two mortgages was never my intention so regardless of profit I will end up selling one anyways.
     
  7. ppnuwan

    ppnuwan Active Member

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    I would have thought option b) would have CGT exemption as it would be 'mere realization of a capital asset' (given we've lived in this property for 3 years before and dual density hasn't been approved back then when we bought it, and we spent quite a lot renovating the old house too). Please clarify if I'm missing something..
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It could go from being a capital asset to a revenue asset and result in deemed disposal and CGT triggered up to a point (which may be exempt if main residence).
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The second house wasn't your main residence prior to you living in it, so you may not be able to claim it as the main residence from the date of purchase of the original property.
     
  10. ppnuwan

    ppnuwan Active Member

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    Thanks Terry..
    I have already given up the option c) which will not work anyway..
    But I'm hoping that Option b) will still be tax exempted..

    In your first reply, you mentioned,
    b) could possibly sell the first one without CGT - but depends on a lot

    What exactly did you mean by 'depends on a lot' may I know please?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    is it under 2 hectares, did you live in it from the settlement etc.
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    When a property is acquired and if your intention is to develop then the main residence exemption will not apply even if it is occupied as your residence. Promptly applying for a DA can taint a claim that a residence is CGT exempt. You may well have marked this property as an isolated profit making intention when it was acquired. The ATO will often explore council, finance and other records to evidence the profit making intent.

    Read Tax Determination TD 92/135

    Its worth eliminating these issue/s to determine IF exemption can apply and how to do this etc. A personal tax review and plan would be prudent to ensure you diligently explore all issues and determine a correct outcome
     
  13. ppnuwan

    ppnuwan Active Member

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    Thanks a lot guys..
    @ Terry: Yes, property is 700 m2 (so under 2 hectares) and Yes, we, whole family, lived there from the date of settlement.

    @Paul: Thanks for sharing this information. Yes, I'll definitely go carefully in this one. When I bought the property I was merely looking for a bigger land with possible future subdivision and build a new house at the back and sell the old one. But back then it was just a proposal and didn't have any confirmation from council whatsoever. And we have been living in this old house for over 2 years. Now that council has confirmed the subdivision (still not approved though, will take another year for that I think) but with many conditions, I have no option but to demolish the old house. There won't be much of a profit due to slow market and the fact we demolish the old house, however we would rather move to a new house even with less or no profit than living in the same old house you know.. Anyways, thanks a lot for all your input, at least now I know where I'm heading and what I need to be equipped with.
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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