CGT for new units

Question

Hi again Julia,

Thank you very much for your reply. As you have indicated it would be
difficult to argue that we are not building with the intention of selling.What we have decided to do is to move into the unit we intended to live immediately after the completion of the construction (which will become our main residence), and rent the other two units out as investment property. The questions now for those two rental units are
1. When is the earliest point in time that I can sell one (or both) rental unit(s) as investment property? Do I have to rent them out for minimum of 3 months? 12 months? or 5 years?
2. If I am allowed to sell as investment property within 12 months after the construction, I presume that 50% discount on the capital gain would still apply, as I have already held this property for more than required 12 month before building three units on it (i.e. before subdivision), I presume those times count towards the required 12 months. Or the 12 months count starts from the the completion of the construction?
3. Is there any GST issue if the sale happens within 5 years? My
understanding is that 5 years after the completion of the construction, the property will no longer be regarded as new house/unit, and will be treated as existing property, i.e. no GST when sell.I thought if I sell within 5 years after the construction, there should be no GST involved, as I do not need to register for GST and I am not claiming the GST credit for the construction cost. For me as owner, it should be the same as selling an existing house. I heard that, in this case, something has to be put in the sale’s contract in relation to GST, but not sure what it is.
4. How to work out the CGT? Is it simply that the sale price less cost base (cost of land + construction cost – any claimed depreciation), which is the proceeds, and half of it is subject to CGT?

I would be grateful if you can shed some light on above questions. Thanks.

Answer

First I will directly answer your questions then state your issues
1) It is a question of fact that you have to prove as to what your intentions are ie whether you built with the intention of selling or holding as a rental. Ideally you need a change in circumstances to justify the sale. Other than 5 years time will not really help.
2) The 12 months starts from when you originally purchased the property, so has expired. But CGT only applies if you get around to issue of building to sell for profit ie business income not capital gain.
3) It is 5 years continuous use as a rental property that will get you out of the GST if you are registered for GST. The contract needs to not say GST applies. The better outcome would be to not have to register for GST in the first case and that is the case if you can prove you did not build with the intention of selling. If that is the case then the sale of the property is the sale of a capital asset. If your turnover of supplies subject to GST is more than $75,000 you have to register for GST. Turnover does not include capital assets it only includes items acquired for resale.
4) You can include the cost of demolition and not have to reduce the cost base for the house that was removed. Then it is all a matter of reasonable apportionment. The sale proceeds are reduced for the value of the plant and equipment and the cost of the plant and equipment is not included in the cost base. The cost base is reduced by depreciation that qualified as a deduction whether you claimed it or not. Yes the difference between the sale proceeds and the cost base is halved but it is also split between you and your wife.

Your problem is you can’t put a margin scheme clause in a contract to sell a property if the sale is not subject to GST. So by putting the clause in you are working against your argument. By not putting it in you are going to cost yourself a lot more in GST if the ATO come along later and decide GST should have applied. There is the ability to apply it retrospectively but the buyer and the ATO have to agree. You can’t of course apply for a ruling on which way the ATO will jump now as it will show you are considering selling at this early stage.

Two things that are important to proving your intention are that you could have afforded to hold them as rentals if everything had gone to plan and what was the change in circumstances that made you decide to sell. You need to get to this point before you apply for the ruling and you need to apply for the ruling before you sell so you don’t miss out on using the margin scheme.
If you can’t come up with a good basis for the ruling you will only be safe if you hold them as rentals for a continuous period of 5 years.

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