Tax Tip 43: Demolishing PPOR and Subdividing land and building 2 houses

Discussion in 'Accounting & Tax' started by Terry_w, 1st Oct, 2015.

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  1. Mike A

    Mike A Well-Known Member

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    1999 ants in your pants. Sounds painful.
     
  2. Joseph33

    Joseph33 Well-Known Member

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    Guys sorry to bring this up again but can I give a scenario and get your advice.

    We have acquired a block of land which we are aiming to move into for a few months it will be our main residence. We plan to later knock down the house and build two detached houses.

    We then plan to move into one whilst we rent out the other house. Am I correct in saying that the house we move into will be our main residence and hence if we sold that house in a years time would be cgt exempt?

    If we then moved into the other house which was tenanted for a year and lived in it for another five years before selling it, we would only be up for cgt for that one year period?

    Thanks in advance
     
  3. Terry_w

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

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    based on the info provided it could be the main residence, but that would depend on the circumstances.

    No for the second question, what about the period before it was tenanted?
     
  4. Joseph33

    Joseph33 Well-Known Member

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    Thanks Terry. With the second house it would be a new dwelling since we would have knocked down the existing house that we were living in so it would have been tenanted as a new house for a year and nothing before that. So hence why I was thinking we would only be up for that one year worth of capital gain if we moved into it?
     
  5. Paul@PAS

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

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    The main residence exemption ends on the knock down (since the asset is just land). However the 4 year rule may allow the land while it is under construct to access the main residence exemption so that while there is a new costbase the replacement asset may (or may not) be full or partially exempt through the period of construction as if it was always your main residence. (s118-150)

    It a good indicator of reasons to seek advice from a tax adviser that knows property taxes well
     
  6. Joseph33

    Joseph33 Well-Known Member

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    Thanks you Paul and Terry. The advice is much appreciated and I will follow up with my Accountant as advised.

    Kind regards,
     
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  7. Macca74

    Macca74 Member

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    Hello Paul & Terry,
    I have another scenario that i dont think has been discussed yet.
    I am a licensed builder - what if i was to buy an old house and demolish and subdivide immediately without renting it out first.
    I already have a ppor and will be building a new ppor on one of the subdivided blocks.
    Once the new dwelling is finished i would sell the existing ppor and move into the newly constructed dwelling.
    After a set period of time i would construct a new dwelling on the second block of land and move into that one once built and sell first constructed house as a ppor exempt.
    Is there any ato rulings that say how many times you can shift ppor within a certain time frame and is this a strategy that can be implemented?
    Thanks in advance
     
  8. Terry_w

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

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    Yes there is a ATO ID or TR which discusses a builder doing this. It indicates that the main residence CGT exemption may not apply where there is a profit making intention, even where the person is living in the property. It would be taxed as revenue so no 50% CGT discount either.
     
  9. Macca74

    Macca74 Member

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    Thanks Terry,
    Do you know what the id number is or a link that i can have a read on the ato website?
     
  10. Terry_w

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

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    not off hand, but it has been mentioned on here many times. it is a very short one and doesn't go into much detail.
     
  11. Paul@PAS

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

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    That ruling is a bit of a warning bell and I always caution it refers to a builder but the person needn't be a builder for the same outcomes. Its about commercial or profit making intentions prevailing above the main residence exemption it two instances
    1. Isolated profit making OR
    2. ordinary income from business activities

    Its fatal for a licensed tradie. And a renovator who "flips" and many other examples.

    We refer to it in our developer toolkit...Page 19

    TD 92/135
     

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  12. Macca74

    Macca74 Member

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    Thanks for the information Paul.
    What about if i was to build a new PPOR to live in for at least 5 years and then build another one?
    Surely this would be ok as the dwelling is not considered new residential premises?
    It is a pain to move houses anyway so maybe it would be better to just build a new one every 5 years and upgrade that way.
    Would it be better to just buy blocks of land that have already been subdivided to build on as if i was to subdivide something myself the tax office would consider the intentions to be profit making is this correct?
    Thanks,
     
  13. Paul@PAS

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

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    You arent thinking this through correctly. You are trying to avoid GST rather than make the system work for you.

    Doing this each 5 years sounds like an eneterprise to me and I would guess you wont stick to the true scope of the 5 year rule which likely means building once each 6 + years.

    Once of the better ways is just do it and ensure you can use the margin scheme. Claim the GST on the build v's the lower GST on the margin scheme and it avoids land tax (? timing) and sells as new so its sells faster than a 5 year + tenanted property

    Build subdiv land may do more harm than good. Its often sold using margin scheme and will stop you choosing to sell using the MS.

    Your intentions are what counts - You want to make a profit through construction and sale.

    Read up on the key issues....
     

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  14. Macca74

    Macca74 Member

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    Hi Paul, i have already built a few investment properties to hold for at least 5 years as i like the depreciation it gives to reduce my tax bill.

    I will continue to do this but i was just thinking about upgrading the ppor aswell while i am at it and hopefully use it as another strategy to slowly get ahead as we are getting a bit sick of the current neighbourhood.

    Thanks for the advice.
     
  15. aussie1

    aussie1 Active Member

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    @Terry_w and @Paul@PAS I have been told some builders will get paid for their services with a property? Eg a novice developer will knock down your PPOR and build 3 townhouses. Give one townhouse to the builder, sell one and then keep the last one as a PPOR? How does this work?

    I have seen this done and not sure how it is possible tax wise?

    Thanks
     
  16. Terry_w

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

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    Transferor tax as a capital gain at market value (or income) and transferee taxed as income and stamp duty too at market val
     
  17. Terry_w

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

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  18. Mike A

    Mike A Well-Known Member

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    Some good examples of the distinction between what the ATO considers to be on capital account vs revenue account. As displayed in these examples intention is a very important part of their decision making process.
     
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  19. Paul@PAS

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

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    It doesnt "work". It usually relies on one or both being ignorant or deliberately evade tax and making tax mistakes and then not being detected. The ATO do a lot of review of new property transfers to match to tax data. Seeing even former home sale not reported being questioned. Council records show who builders are and GST claims on inputs but no income will expose a risk. PEXA has some controls too which I see the ATO can also access. Its also used for duties. Had a client pinged with a partition. The partition parties were not both legal owners o_O so it was seen as avoidance.

    The new ATO guidance is disappointing after the consultation period examples several years ago. Its so basic to compare a non-enterprise sale of a CGT asset by a trust vs isolated profit making and enterprise.
     
  20. Mike A

    Mike A Well-Known Member

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    Unfortunately they didnt include some of the more complex ones where the original intention was to buy, build and sell and then through circumstances outside the control of the taxpayer they are forced to sell. So what would ordinarily be new residential premises subject to GST and as a profit from an isolated transaction could well be not subject to GST and on capital account.

    Becoming more common now as interest rates have increased and the original intention of building and keeping which was a decision made during a low interest rate period has now changed.
     
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