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My question is my husband and I bought dilapidated house 14 yrs ago for approx 820k as our PPOR (we have no investment property) and went through kitchen and bathrooms reno in between. Late 2024 we knockdown and started building a duplex, subdividing titles. We took construction loan for 1.9m for the duplex built, whilst still got 450k in original house loan.
The plan is to rent duplex B and keep duplex A as PPOR. Now we’re looking at two options upon completion: Duplex A as PPOR, sell duplex B immediately upon completion (will attract bigger CGT), or Option 2 which not sure if allowed, live at duplex B as PPOR for 1 yr, rent out Duplex A (treat as investment). After 1 yr move to duplex A as new PPOR and sell Duplex B (CGT exempt since PPOR initially) and attract CGT exemption therefore better option?
Can you please guide me if this is the best option. Is this correct? Is it also worth it to get a market valuation report prior to occupancy to use for CGT calculations later especially to reset the cost base of the property? Will this be important?
Thank you so much.
Answer
Unless you can somehow convince the ATO you really did intend to keep one as a rental right up until the completion but then had a change of circumstances, unforeseen, that is forcing you to sell, you are stuck with GST applying to this sale. Further there will be no 50% CGT discount because the ATO will consider you to be running a profit making business not investing for capital gains. I say that you need to convince the ATO that you built with the intention of long term hold because it is advisable to get a ruling from them before you proceed with the sale, for a number of reasons:
- The purchaser will withhold part of the sale proceeds because it is the first sale of a new property and send that money to the ATO so you are going to have to come clean with them anyway to get that money back. In fact, the bank might not even allow settlement with that much of the sale proceeds being withheld.
- If you get a negative ruling result from the ATO at least you can put a margin scheme clause in the contract which will reduce the GST payable.
- If you get a negative ruling result you can act now to claim back the GST input credits on the building costs before the 4 year window closes. Something that it might be too late to do when the ATO eventually come knocking. They will come knocking because they data match all this stuff.
The main residence CGT exemption belongs to the dwelling and land around it only by association with the dwelling. So, if you demolish the dwelling your main residence exemption is lost. Section 118-150 ITAA 1997 will allow you to build a bridge between the old dwelling and the new dwelling so that the main residence exemption is not lost, providing:
- You move into the new house as soon as practical after the certificate of occupancy is issued and of course treat it as your own home in such a way that shows real intention to make it your home.
- You do not cover another property with your main residence exemption during any of the time
- You covered the old property 100% with your main residence exemption before it is demolished ie not earning any income
So, you can happily live in one of those units with the full main residence exemption concessions. But only the first one you move into gets to go right back to when you first purchased the land. The ATO can decide that just because you lived there for a year doesn’t cut it as really an intention to build a home rather than sell for a profit. They can say that it was always your intention to resell for profit so no main residence exemption the 1 year was just a ruse. If it is caught as normal business income CGT does not even get a look in, so no main residence exemption. So, you have a lot to lose by trying to jump between properties. I would just stay put in the first one unless there is some clear unforeseen circumstance that made you have to move out and sell and I would get an ATO ruling before you did. Just because you lived in the first unit for a year does not prevent the ATO from finding that you built it with the intention to make a profit from a business of constructing properties to sell. Have a listen to McCurry’s case https://www.youtube.com/watch?v=usW1zL6QwdA they lived there for a lot longer and even rented it as their home when they sold it but were still considered to have built it with the intention of selling!
If you need to sell one unit to afford to hold the other then the ATO are going to say you must have built with the intention of resale because you could not afford to hold, so that unit you don’t move into is going to be subject to GST and no 50% CGT discount.
Have a look at MT 2006/1 paragraph 273 https://www.ato.gov.au/law/view/document?DocID=MXR/MT20061/NAT/ATO/00001 Entitled to an ABN means subject to GST.
Example 29
273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.
274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.
275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.
276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.
There are no clever tricks here but the whole situation is full of traps so please get onto your Accountant and register for GST in regard to the one you are going to sell and get those GST input credits back. Make sure there is a margin scheme clause in the contract. Move into the one you are going to live in right from the start, as soon as the certificate of completion is issued and stay there do not risk losing the bridge between the old and new house or you will lose all 14 years of main residence days on your old home.
Thank you for letting your Q&A be published it is a great example of a common question.
Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice on your particular circumstances.
