Am I a Developer or Merely Realising an Asset

Question

September 2014 my husband and I sold our home and purchased a property on 774sqm with an old house. Our intent was to demolish the house and build a new home for ourselves. We moved into the old house immediately after settlement and intend to live in it until the new house was ready to be constructed. Concurrently my mother was no longer able to live alone and reluctantly had to move into a nursing home. The property we purchased was a corner block and we thought we could build a house for ourselves at the front and a secondary dwelling (granny flat) at the rear facing the side street for my mother.

While doing the rounds of all the builders asking about building 2 dwellings, the general consensus from the builders was, that due to the recent changes in Brisbane City Council town plan, it may be possible for us to split the land (even though it’s under 800sqm). That way we could build two separately titled properties and not be limited to the rules affecting granny flats. Advice from builders, talk to a town planner. Which we did.

Town Planner initially said not likely, then after further investigation came back and said "may be possible" but would need to be an Impact Assessment application. We decided to go ahead with the application and it is currently with Brisbane City Council being assessed.

In the meantime, mother decided she likes the nursing home and doesn’t want to move again.

I reiterate, at this stage we don’t know if we will get the subdivision approved. However, if we do, we thought we could still build on one block for ourselves and just sell the second block and be subject to CGT. I’ve found and read your booklet "How not to be a Developer" and am now worried that we may have opened a can of worms for ourselves. We are retired and don’t want any hassles with GST etc.

My question is:-
At what point do we move from Realising the Asset to Property Developer?

If we get the application approved and then sell the property, as it is, with just the approval in place is that considered "realising an asset" or because we only bought the property in September would the Tax Dept consider that we intended all along to "make profit from it".

Ultimately, we want to build here but don’t need the surplus land. We don’t want taxation headaches either and are frighted that if we go ahead with the subdivision, build our home and then sell the extra block we would need to register for GST and pay Income Tax on the Sale.

Thanks Julia



Answer


The onus of proof is on the taxpayer. So assuming the ATO don’t consider that you made up the story to get out of the tax then you have not done anything that is business like ie built on the land so your activities have not changed from private to business like. So if you can convince them that you didn’t buy the property with the intention of subdividing and selling then this did not start out as a business venture and nothing has changed. Independent evidence of your original intentions would be really useful.

Now your catch is if you just hope for the best then you will sell under a contract that states GST does not apply. If later the ATO decides it does apply you will be stuck with paying them 1/11th. With the benefit of hindsight you would have been able to utilise the margin scheme which would reduce the GST considerably. An election to use the margin scheme needs to be agreed to in writing by the buyer at the time of or before entering into the contract. There is an option to apply to the ATO for an extension of this time but you still need the buyer to agree. You can’t put a just in case margin scheme clause in there because you need to be registered for GST to do that.

In short it is worth the effort to apply to the ATO for a ruling on the matter to be sure. Have a read of https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1012730145598.htm The taxpayer freely admitted that they bought with the intention of selling off the other block and the ATO accepted that they were merely realising an asset, it was not a business venture, simply because they wanted the house but didn’t want so much land.
I didn’t like their chances but suggested they apply themselves because I feel the ATO are tougher when a professional applies. They just told their story and asked whether they were merely realising and asset ie not in business and not an enterprise for GST purposes.

It all boils down to whether the ATO are going to believe you or not, I can’t tell you that. You need to ask them. Here is the form that you need to fill out:
https://www.ato.gov.au/uploadedFiles/Content/CS_C/downloads/QC_19147_download.pdf

Make sure you don’t sell the land until after September 2015 as you need to hold it for more than 12 months from the date you signed to buy to the date you sign to sell (not settlement dates), in order to qualify for the 50% CGT discount. The subdivision of the land, without a change of the underlying ownership, does not restart the 12 month clock.

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