Triplex - Capital Gains & GST Question

Hi everyone,

We have a family member on a low income who is planning to knock down their existing property (PPOR) to build a triplex.

• Total build cost is approximately $1million
• Upon completion, each triplex will be worth 800K (Total for 3 dwellings = $2.4 million)
• She also has an existing loan on the current property (~110K)
• She will be living in one dwelling, rent out the second and sell the third to a family member

Queries

1. Would she be eligible to apply for a residential construction loan for a triplex?
2. Would she be able to sell one dwelling to a family member without incurring capital gains tax and GST?
3. Is there a way for the purchaser (family member) to be exempt from stamp duty?

Thanks!

 

1. Yes - but with a low income she would have some issues qualifying

2. It will depend on the circumstances, she will need specific advice - it could be possible, but will have consequences.

3. Yes, depending on the circumstances. Legal advice is needed on duty laws. Probably unlikely though.

 

2. It will be impossible to avoid CGT, When the former home is demolished the CGT exemption stops. It wont restart on much of the site and the change is retrospective as if the 2/3rd of the land was never part of the home.

GST is less likely but would need advice. A simple issue like changing your mind and selling the rental could trigger a backdated problem GST can also apply to a transfer to family. GST laws dont exempt family from what a taxable supply is. They get dragged into a enterprise too. I would think could well apply.

 

what if they ....

 

One of the most common myths is that you can sell off your backyard and since its part of your own home its tax free. Thats 100% false. The development creates a new CGT asset for the build portion which is added to the costbase for the original land (whether a separate title or not). The land is treated as if it was never the main residence and it is not given any CGT exemption. But the new main residence portion does access the new construction rule which will effectively backdate the exemption so that continuity occurs for the 1/rd used as the home

The costbase in such cases is somewhat difficult to determine and a valuer should be consulted after tax advice

 

that is true, but what about the 3 month rule>

 

after tax advice.....

Another popular question. I build a duplex etc. I live in one half and meet the 3 months new build rule. Then I move to the other unit. I can sell the first CGT exempt right ? And then there is no CGT on the other ?

I will disregard TD 92/135 for now which could be quite relevant here. And the issue of enterprise. But lets just consider the potential CGT issue assuming it is a CGT asset.

The final home may be exposed to future CGT at the expense of a choice of exemption. So to compare correctly you cant just say = no CGT. A CGT election (if available) will have an opposing tax issue to consider.

 

Correct answer is often there is no single right answer too. This can actually be a very complex area of tax law often incorrectly given (or not !!!) advice when tax advisers arent skilled in property based tax issues and relevant rulings and law. As far as taxpayers self diagnosing I would have doubts most taxpayers would consider every issue they should be.

 

ATO would probably argue that both were a profit from an isolated transaction and the main residence exemption cant be applied to either property.

 

Yep....TD 92/135 is a short and simple tax ruling on that issue. Dont be fooled by the example of the owner being a "builder". The key element of this ruling is found here :

In cases where the sale of a dwelling gives rise to income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), for example as part of a business or from an isolated profit-making transaction, that income remains assessable even if a main residence exemption is available for CGT purposes. The main residence exemption in Subdivision 118-B of the ITAA 1997 is a capital gains tax exemption only and does not extend to exempt from tax ordinary profits or business income.

 

agreed Paul jut because someone isn't a builder doesn't mean that it isn't a profit from an isolated transaction.