Ask Ban Tacs Question
We are building a house to sell and will have to pay GST and income tax on it as we don’t intend to move in. We have been claiming Gst along the way and have set up an ABN. We have two lines of credit – one for $150000 which covers both our own $100000 owing on our principle place of residence and about $50000 owing on the house we are building. We have another line of credit for about $1.15 million owing on the new house. (loan on new house total is $1.2 million)
Our own home would sell for about $650000 and the new house for about $1.3 million. My husbands income is $80000 per annum. I dont work and both houses are in joint names. The new house could rent for $1200 per week.
Do we have a better option than selling the new house and paying all the tax? We would love to live in the new house and avoid paying the tax. We could sell our home and live in the new house for a year and then sell it but we would have a large loan and interest bill for the year so maybe we wouldn’t be any better off.
We could also keep both homes and rent out the new one for a year or two and apply all the rent to our $150k LOC and increase the other LOC. But then what would we have accomplished . We would have transferred the loan to the new house but we would still have to sell it and then pay off the larger loan. And on our income tax return when working out expenses and income of the business would we still have to apply the rent as income? So maybe we wouldn’t gain anything there.
Before we sell the new house we just want to be sure we are doing the best thing tax and profit wise.
Answer
The decision to sell the houses is more than just a simple tax question within the scope of askbantacs. You need to sit down with an accountant and consider the options you can afford. This process covers a few little know areas of property tax so to help your accountant out, working through your options refer the following:
PBR 90780 recognises that you can actually change the status of the house from trading stock to investment. This means that the profit on sale could qualify for the 50% CGT discount.
If you change the purpose of holding the property from sale to investment you are deemed for income tax purposes to have sold it and then re purchased the property at its cost, thus transferring the profit across to a capital gain. From that point onwards CGT will apply and the 50% discount if you have held the property for more than 12 months since you purchased the land.
You can change your mind and choose to keep the house for private use. Section 70-80 allows this change over for income tax purposes at cost. For GST purposes you can de register and pay all the GST back under section 138. There are also some bonuses here in that if the invoices are for less than $1,000 the GST does not have to be paid back because the adjustment period has expired. GSTR 2009/4 goes into this in detail
Obviously you can’t just change your mind because it suites you for tax purposes and then sell the property anyway. That is just a scheme with a dominant purpose of a tax benefit. What you need to consider is whether this is nothing more than scheme to avoid tax and you did not bona fide make it your home .
Choosing to hold it as a rental for 5 years will change it to a supply that is not subject to GST even if you are still registered. If you are no longer registered Section 23-5 states that if the annual turnover of supplies you make in the normal course of your enterprise, exceed $75,000 you must register for GST. Section 185-25 excludes from the calculation of annual turnover the supply of a capital asset. Building the property for rental then selling, is the supply of a capital asset and not included in the annual turnover.
I doubt that you can afford to hold onto the new house for long and the buying and selling costs may be more than any tax saved even if the ATO didn’t consider it all to be just a sham to avoid tax
