Would you go ahead and build as planned under the following circumstances?
GRAND PLAN: New development proposed on PRIOR PRINCIPAL PLACE OF RESIDENCE purchased as private home in 1998
As tenants in common owners completed a 4 unit development in 2009 on land purchased for intention of building rental properties. (not the P.P.R)Three of the units are still held as rental properties. One unit became P.P.R upon completion.(Change of intention, no expenses claimed back on tax). The unit was held and lived in for one year (by owners/developers) then sold in 2010.(first ever development, not GST registered, work in an unrelated industry.)
NEW DEVELOPMENT PROPOSED ON PRIOR P.P.R PURCHASHED IN 1998
Prior P.P.R was converted to investment property by way of a sworn valuation when owners moved into unit. Prior P.P.R was rented out for the 12 months they spent in the unit. (Land tax obligation was amended to reflect this change of status).
OWNERS MOVED BACK INTO PRIOR P.P.R once tenants left (and after unit sold)and now have planning permit for construction of 2 new dwellings on the block (existing(Prior P.P.R) house to be demolished). (Have not changed land tax structure, still classified as investment property but no rental income to declare.)
THE PLAN IS, build the 2 new homes, sell one to cover costs and live in the other one. (The one they live in will also possibly be sold after 12 months)
I realize the newly sold home will attract GST (I think!) and CGT, but will the ATO allow them to claim P.P.R tax exemption on the other home do you think? (it is also highly likely to be sold after 12 months to buy next P.P.R)
Well moving back in has cancelled any opportunity to scrap depreciable items on the demolition.
Can’t see any reason why you would leave the land tax the way it is. Am I missing something?
“Newly sold one” will be subject to normal income tax (ie no 50% CGT discount) for profit above the valuation when it was committed to the project. Gain before then will be subject to CGT starting with a cost base of its share of that valuation when you first rented it out assuming all the requirements of 118-192 are met (reset cost base when first earn income rules)
Subdivision 118-B – Main residence
Partial exemption rules
SECTION 118-192 Special rule for first use to produce income ITAA 36
There is a special rule if:
(a) you would get only a partial exemption under this Subdivision for a *CGT event happening in relation to a *dwelling or your *ownership interest in it because the dwelling was used for the *purpose of producing assessable income during your *ownership period; and
(aa) that use occurred for the first time after 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996; and
(b) you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time) it was used for that purpose during your ownership period.
You are taken to have *acquired the *dwelling or your *ownership interest at the income time for its *market value at that time.
If your *ownership interest in the *dwelling *passed to you as a beneficiary in a deceased’s estate, or you owned it as the trustee of a deceased estate and the *CGT event did not happen within 2 years of the deceased’s death, you apply this Subdivision as if:
(a) you had *acquired the interest as an individual and not as a beneficiary or trustee of a deceased estate; and
(b) for applying the formula in section 118-185, your non-main residence days were the number of days in your *ownership period when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.
Certainly GST applies to the one you built to sell, though you can utilize the margin scheme to ensure that GST is only payable on the difference between the selling price and the market value at the date you were forced to register ie the date you commenced the project of building the house to sell on completion.
Now with the one you will live in: The onus of proof is on you as to whether you built the property with the intention of selling or the intention of using it as your home. Section 118-150 only requires you to live in a property for 3 months after you demolish to be able to continue to cover the property with your main residence exemption during construction. So you are fine if you can get past the onus of proof that you didn’t build it to sell. If it was built to sell then you will be up for GST on that as well, whether you live in it or not. Let alone some of the profit being exposed to normal income tax. If all is fine and it is accepted that you built it to make it your home then Section 118-150 will allow you to cover it with your main residence exemption during the period of construction providing you move in as soon as possible on completion and live there for at least 3 months. Ideally I would like you to have some external influence that meant you had to give up this house and move elsewhere.
Subdivision 118-B – Main residence
Rules that may extend the exemption
SECTION 118-150 If you build, repair or renovate a dwelling ITAA 36
This section applies to land in which you have an *ownership interest (except a life interest) if you build a *dwelling on the land, or repair, renovate or finish building a dwelling on the land.
You can choose to apply this Subdivision as if the *dwelling that you are building, repairing or renovating on the land were your main residence from the time you *acquired the *ownership interest.
You can make the choice only if:
(a) a *dwelling on the land that you construct, repair or renovate becomes your main residence (except because of section118-147) as soon as practicable after the work is finished; and
(b) it continues to be your main residence for at least 3 months.
There is a time limit during which the choice can operate. This is the shorter of:
(a) 4 years before the *dwelling becomes your main residence; or
(b) the period starting when you *acquired your *ownership interest in the land and ending when the dwelling becomes your main residence.
If there was already a *dwelling on the land when you *acquired your *ownership interest and you or someone else occupied it after that time, the period in subsection (2) and paragraph (4)(b) starts when the dwelling ceased to be occupied.
Once you make the choice, no other *dwelling can be treated as your main residence during the period referred to in subsection (4), except if section118-140 (about changing main residences) applies.
GST – it is important that once you have sold the unit you built to sell, that you de register for GST. Just one less obstacle. Of course you do not claim the GST back on any of the construction costs for the one you live and make sure you apportion on a reasonable basis combined expenses.
Short answer – No if you genuinely built the unit with the intention of living there for personal reasons rather than the tax benefit I don’t expect the ATO will give you any grief and I don’t think you are setting off any bells, but remember the onus of proof rests with you. And the ATO has the benefit of hindsight so it is not good if you keep on doing this and you have already done that once. Having a good reason for moving would be a great benefit. I cannot really advise you with any certainty just what an individual ATO auditor will think if they look at it and the only way to be sure is to put your hand up now and ask for their opinion in a private ruling