Ask Ban Tacs Question
First of all, apology for my English. Hopefully you understand what my questions are.
I will try my best to describe my current situation as much as I can.
Also thank you for offering this questioning system!
I have purchased an old house in April 2021 and since then I have been living in the house so far. As of my first intention of purchasing this property, I’m going to develop this to 3 townhouses through subdivision. I’m trying to calculate the profit through this project but stuck with taxes now.
Here are two scenarios I’m thinking of..
First scenario I keep one unit as a PPR and sell other 2 upon completion.
- In this case, Do I have to register ABN (construction) to claim GST back?
- If I register GST can I still get CGT discount when I sell 2 units after 1 year of possession?
- If CGT discount is available when the 12months period starts from? From the date I originally acuired this property (April 2021)? or from the date I get 3 lot’s titles through subdivision?
- If I do pre-sale for the 2 units, the 12 months period will be counted until purchaser sign on contract or the settlement date?
- My accountant told me that I better not register GST. If I register GST then it becomes business-like so I won’t be able to use the CGT discount. Also Getting CGT discount is more beneficial than getting GST claim generally. Is this true?
- I purchased the house at 500k with no GST, Is the Margin scheme applies to my case when i sell 2 units?
Second scenario I live in first unit and rent second, third out for a year and sell the first unit, and then move to second unit live another year and sell.
- Is this illegal doing this to get CGT exampt as a primary residence?
- If not, GST still applies to the units i sell if i dispose before they become 5 years because it’s new?
Thank you for reading and looking forwards to hearing from you soon!
Answer
First scenario I keep one unit as a PPR and sell other 2 upon completion.
- In this case, Do I have to register ABN (construction) to claim GST back? Yes, reference MT 2006/1 paragraph 273. But only claim back on 2 of the units
- If I register GST can I still get CGT discount when I sell 2 units after 1 year of possesion? No, as on revenue account as you built them with the intention of selling, it is a business.
- If CGT discount is available, when the 12months period starts from? From the date I originally acuired this property (April 2021)? or from the date I get 3 lot’s titles through subdivision? If it did apply the 12 months would be from the date you originally purchased the property.
- If i do pre-sale for the 2 units, the 12 months period will be counted until purchaser sign on contract or the settlement date? This is not applicable but the 12 months, for CGT purposes, would finish at the date of signing the contract for the pre sale. As the units will be on revenue account the date of the transaction is actually settlement date.
- My accountant told me that I better not register GST. If I register GST then it becomes business-like so I won’t be able to use the CGT discount. Also Getting CGT discount is more beneficial than getting GST claim generally. Is this true? You don’t have a choice the fact that you are building to resell means you are in business. Besides being able to claim GST input credits and then having to pay GST on the sale price is only a win if you make a loss on the project.
- I purchased the house at 500k with no GST, Is the Margin scheme applies to my case when i sell 2 units? Yes you can use the margin scheme if the buyer agrees.
The second scenario is where it becomes a question of proving your thoughts. The onus of proof is on you to show that you did not build the townhouses with the intention of selling them. The less time you own them the harder this is to prove. There is a carve out in that if you hold a property as a rental for a continuous period of 5 years and did not claim GST input credits on construction or paid them back before the 5 year period started, then you do not have to charge GST when you sell.
The main residence exemption is in the CGT provisions. CGT only applies if you are not caught by on revenue account. This means that if the ATO find that you built a unit you are living in with the intention of resale at a profit then living there makes no difference at all the whole profit is still taxable.
If you are going to build units and sell them within less than 5 years, in order to argue that you did not build them with the intention of resale at a profit you would need to have a change of circumstances that was unforeseen to show why you had to change your mind and sell them.
Of course you can only claim the main residence exemption on one property over any given period of time. There is an exception in the 6 months overlap rule section 118-140 but has very limited application.
Above is a direct answer to your questions but it is probably worth viewing and reading the following to get a wider view.
https://www.youtube.com/watch?v=usW1zL6QwdA&t=8s
