Tax treatment for demolishing PPOR, subdividing into two lots

Hi Tax Gurus

I want to demolish my PPOR, then subdivided the block into two (front and back), build a house on the front for myself and build on the rear block and then sell the rear house.

I have only been able to find examples on ATO website where one retains front house and subdivides and sells the rear block.

Are these two scenarios similar enough to have same tax treatment.

Cheers.

 

If you sell the rear block you will pay capital gains tax on the sale.

The main residence exemption will apply to the sale of your family home so it will be tax free when you sell - assuming it was properly used as a main residence.

GST would not apply to the sale of either. If you built on he back block and then sold GST might be payable.

Their might be some issues (opportunities) regarding the apportionment of costs.

 

The main residence exemption ends when you no longer reside on land and you certainly cant reside on vacant land or on land with a home under construction. No absence rule etc covers this and that can complicate things a little compared to the ATO example of selling off a bit of surplus land which is a CGT event. The reason for that simple example is it tries to demonstrate a simple CGT specific issue. I would argue that you are developing to profit by doing more than merely selling off extra land than a more complex outcome occurs.....So the future sale of your new home and the new second property wont be a CGT event and wont be exempt ....TD 92/135 provides the ATO views on this for the home portion

IMO its dangerous to mix a home and development together.

It would be VERY important that the proposal gets some advice. The advice may also act as evidence of intention later. I would caution that if you proceed than it would be important that the new home stays your home for a reasonable period of time. This assists to prevent the ATO arguing your intention was to profit and isolates that tax issue to a CGT issue etc.

You will need a valuer to assist with apportioning historical costs into two parcels of land. This would be explained as part of the tax advice.

 

Thanks Ross and Paul.

 

can be a nasty sting in the tail where you demolish your PPOR and then sell the land with nothing on it.

CGT Event C1 will happen when you demolish the property. Taxation Determination TD 1999/79 confirms that CGT event C1 can happen on the voluntary destruction of an asset, for example where somone might demolish a building in the course of redeveloping a property. The demolition of the house would fall within the concept of 'destruction' for the purpose of CGT event C1.

capital gain on CGT Event C1 will generally be nil as no proceeds are received.

Issue you then have when you sell the land you can't apply the main residence exemptions as there is no house on the land. Nasty Nasty Nasty.

Tax advice beforehand could have mitigated that issue.

Rebuilding on a new main residence on the land is a seperate issue.

Nice summary of the issues in private binding ruling PBR 39073 RBA Content

 

From ATO website

Treating land as your main residence

Vacant land may also be treated as your main residence if it is vacant because your home has been destroyed.

However, you can choose to treat land as your main residence for up to four years before the dwelling becomes your main residence in certain circumstances. You can choose to have this exemption apply if you acquire an ownership interest (other than a life interest) in land and you:

• build a dwelling on the land
• repair or renovate an existing dwelling on the land, or
• finish a partly constructed dwelling on the land.

There are a number of conditions that you must satisfy before you can claim the exemption. You must first finish building, repairing or renovating the dwelling and then:

• move into the dwelling as soon as practicable after it is finished
• continue to use the dwelling as your main residence for at least three months after it becomes your main residence.

 

zac101. thats right BUT only if you build a new main residence on the land. if you demolish the old PPOR and sell the vacant land then sorry no main residence applies. Nasty isn't it

 

And the GST issue rears its very ugly head too since its not existing residential premises that are input taxed (ie no GST on sale). If the former home was destroyed (fire) there is a safety net that its a mere realisation but if you demo it the resulting issue is a problem

Selling a property with the redundant home ready for the buyer to demo (even with a approval to demo) may be a far better GST outcome that demo as it removes the argument about a taxable supply. MT2006/1 considers factors about who may be conducting a enterprise and the steps to sell vacant land which was once a homesite seems to easily leave a GST issue. So - avoid it. Key issue is that the home must still be habitable as was / is capable of residential occupation immediately prior to transfer. ie services all connected etc. And with a tenant about to move out is even better.

Just some of the ideas that novice developers can fall foul of and why a personal site tax plan is so important. Advisers like Mike etc can then steer the right outcomes.