Join Australia's most dynamic and respected property investment community

Understanding CGT events

Discussion in 'Accounting & Tax' started by Mumbai, 14th Jul, 2016.

Tags:
  1. Mumbai

    Mumbai Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    763
    Location:
    Sydney
    Scenario 1:
    Say, I demolish my PPOR (live on rent elsewhere) and build duplex on that land and sell them both.
    Will I incur CGT on the propert(y)ies, assuming there is a profit? OR
    will that be exempt as it is my only PPOR?

    Scenario 2:
    Say, I demolish my IP and build duplex. Sell one and live in other.
    How will the CGT be calculated in this case?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,949
    Location:
    Sydney
    1. Sounds like it might go from capital account to trading stock. Could be a deemed disposal which triggers a CGT even though not yet sold.

    2. Could be as above. or could be capital account with cost base costs apportioned.
     
    Perthguy and Mumbai like this.
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,358
    Location:
    Sydney
    The main residence exemption ends when you move out. Cant continue if its just land.
    Intention is to produce profit and taxable. +GST.

    1. Probable that CGT wont apply and a CGT event occurs as Terry says so that trading stock is held. The gain up to that point would be exempt if its been home whole time. CGT event K4 requires market value of the LAND* to be determined when it ceases to be home and commences to be land held for dev. That gain would be exempt if its had been held as main residence whole time.

    However its more likely that as a business is not being conducted that the land is NOT trading stock but held ... and any profit is from an isolated transaction...That can complicate matters and affect land "cost" etc..Specific advice time.

    2. Build costs + land value etc all add to cost of dev
    3. Profit 100% taxable as ordinary income (exclude GST from sale price and on costs)
    4. GST on sales - Consider margin scheme (second use for the valuation if it was bought before 1/7/00 !!) and claim GST on build costs

    See my developer toolkit for the details includes margin scheme example etc

    * Valuation basis must be based on land in use for a dev and NOT as a dwelling and land.
     

    Attached Files:

    Last edited: 14th Jul, 2016
    Perthguy and Mumbai like this.
  4. sanj

    sanj Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,139
    Location:
    Perth
    I think you will find that for a scenario like this it is often worth selling your property as is and tax free than to go through the process of building 2 homes then paying the selling fees along with gst and tax as the net $$ gain after tax is often not much more if at all and involves a lot more time, capital and effort. if youre building to its a different story.

    you would also want your existing PPOR to be effectively worth nothing because even if your property is worth 100k more than a comparable block of land it will mean it makes more sense to sell it and buy a comparable vacant block to develop, should the feaso be that compelling.

    ultimately developments are about making money, beware not to fall into the trap of doing a project for the sake of it.
     
    Mumbai likes this.
  5. Mumbai

    Mumbai Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    763
    Location:
    Sydney
    Thanks all for the responses.
    @sanj It was an hypothetical question, but given the insight, I will definitely take that into consideration.
     
    sanj likes this.
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,949
    Location:
    Sydney
    One strategy is to sell to a related entity so the main residence exemption can apply from the beginning until that point.
     
    sanj likes this.
  7. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

    Joined:
    24th Jun, 2015
    Posts:
    227
    Location:
    Philippines
    Don't agree with you on that one. The exemption does not usually apply to disposals of vacant land except in some very limited circumstances.

    - certain adjacent land is sold together with the building
    - a dwelling is accidentally destroyed and the land is sold as vacant land
    - adjacent land is compulsory acquired without the dwelling ; and
    - a dwelling is build on vacant land

    Under s 118-160 of the ITAA a taxpayer can chose to apply the exemption to the sale of vacant land (up to two hectares) after a dwelling that was situated on the land and which was their main residence was accidentally destroyed (.e.g by fire) and another dwelling was not built on the land.

    Refer s 118-160(2) and ID 2003/214 for some guidance.
     
    Last edited: 14th Jul, 2016
    Perthguy likes this.
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,358
    Location:
    Sydney
    Ah Mike I thought someone might post on that generalisation. My reply was confined to the OP issue where the exemption doesnt continue.
     
    Perthguy likes this.
  9. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

    Joined:
    24th Jun, 2015
    Posts:
    227
    Location:
    Philippines
    Only you , I and Terry are probably that anal :p
     
  10. Mumbai

    Mumbai Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    763
    Location:
    Sydney
    Threesome ;)
     
  11. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

    Joined:
    24th Jun, 2015
    Posts:
    227
    Location:
    Philippines
    That is a truly frightening concept and a total breach of the ITAA 1997 :p
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,358
    Location:
    Sydney
    Leave me out of that. I'm an accountant and need to have a tight arse