Ask Ban Tacs Question
Hi Bantacs
· September 2012 we bought a property in Melbourne East. The property had a small house with a large backyard. After settlement we occupied this house. We had two kids at that time both Autistic. After the birth of my third child we decided to build a larger town house in the back yard for our self to occupy. Town Planning and building permit were obtained , the town house was built by a builder and we finally moved in to the backyard new town house in August 2015. At this time we were blessed with our fourth son. We sold the old house at the front as PPR after moving to the new one at the back in October 2015 as PPR. Soon after moving to the back we had issues for the bus picking up my Autistic kids. Once my 5 year old kid had his hand fractured falling from stairs. Pushed other younger brothers from upstairs down and so on. This new town house was built with a lot of love , however with the young growing family with Autism along me and my wife decided to have a home with its own street frontage and amenities for our special kids. So we started to look for a new home.
· We could not afford our suitable home , neither any we could afford were having the amenities we were specifically after hence we decided to buy an old house and build something that suits our specific needs at stage we could afford to build. Finally we bought such old property and settlement is due on 18th April 2016. We now intend to move in to this new purchase as PPR and sell the town house as PPR. Once the town house is sold we may be able to build a house that is secured and friendly to my kids special needs. We intend to build this house after a year or so after occupation when plans and builder is finalised. During the time it is build we will move to a rental close by.
The other option is to stay in our existing PPR , rent out the new purchased home for a year then demolish it and replace with new one and then occupy as PPR. Say it is rented for 1 year and the building takes one year further after which we occupy. Now if things change and we have to sell this home after 2 years. what could be CGT implications.
Questions are
1. Is there any CGT implication when we sell the town house build less than a year ago that is our PPR now. FYI the intend was always to live in it and we did not claim a cent of the mortgage and or any building or other planning costs in our tax. Was occupied immediately after completion
2. Do you foresee any CGT implication on the new build where the existing house will be required to be demolished and replaced with a new one in case if we sell (don’t intend to though) in long future if we occupy and then build new one and re occupy new again i.e. never rented out
3. What are CGT implications when we rent out the new purchase (1 year) , then demolish and build new (1 year)and occupy after which if we occupy as PPR (2 yrs) and sell.
Any relevant consideration/advice will be highly appreciated.
Answer
There is more than one question here so I am going to give you a good overview to cover them all rather than drill down specifically to one question but this does mean you should get advice once you have decided the path you are going to take.
Your first problem is the onus of proof is on you to convince the ATO that your intentions were not to build for profit. If they don’t believe you then no main residence exemption or 50% CGT discount. The only way you can have any certainty as to what their opinion will be on the day is to apply for a ruling now.
If the ATO accept your circumstances that you neither built or purchased any of the properties with the intention of selling for a profit then:
The townhouse will be partially subject to CGT. You need to take the cost base of the original property and apportion it to get the bit that represents the land under the townhouse. You can increase this by, its share, of any holding costs such as interest, rates, insurance, repairs, even maintenance costs such as cleaning materials for the townhouse and lawn mower fuel. You also increase the cost base by the construction cost of the townhouse but most of the subdivision costs will be apportioned between the two houses.
Regarding the move from the Townhouse to the new old house you can only cover both properties with your main residence exemption for a period of 6 months, dating back from the date you sell the town house and it cannot be used to produce income while you are not living there and you must have lived there for at least 3 continuous months in the 12 months prior to selling. There is no restriction on the new old house re the 6 months overlap rule but if you don’t move into the new old house as soon as practical after settlement there will be a sleeping CGT liability. And if you don’t cover the new old house with your main residence exemption right from the start you may not be allowed to use the concession in ID 2003/232
Now I am assuming you are going to demolish this old new house and build a new new house. ID 2003/232 allows you to build a bridge between the two houses and cover the property with your main residence exemption as if the same building had always been there. But you must adhered strictly to section 118-150 197 ITAA. It will allow you to cover the new old house with your main residence exemption right from the time you buy it providing you move it and live in it as your home fully covering it with your main residence exemption immediately after settlement. Though you are entitled to use the 6 months overlap rule described above it is still recommended that you move into the old new house because if your town house does not sell within 6 months you are going to be left with a hole in your main residence exemption on the new old house, at the start and that jeopardises ID 2003/232. Section 118-50 also requires that you, other than the 6 months overlap, do not cover another property with your main exemption during that time. The new new home needs to be completed with 4 years of you moving out of the old new home. When you build the new new home there you must move into it as soon as it is completed and live there for at least 3 months. Further, no one else can live in the old new home while you are not living there. So no renting the property out if you want to build this bridge.
Of course if you stay in the Town house and rent out the new old home you are not even going to start to be able to protect that property with your main residence exemption until the tenant moves out so there will always be some liability on that property. If you go and sell this property soon after you build it you are in an even more difficult position when it comes to convincing the ATO you did not build any of the houses for a profit making purpose. If they do find that you had a profit making motive they will expect you to pay them 1/11th of the sale proceeds in GST and not allow you the main residence exemption or the 50% CGT discount. This is why I suggest a ruling there is just too much money at stake to take the risk.
Selling the second house you build soon after it is built is just asking for trouble that could go back and bite the townhouse. All sales are reported by the titles office to the ATO.
I have given you a lot of information here. Rather than just restrict you to one specific question I have tried to cover the whole lot without drilling right down. Once you have decided on a particular path it is worth talking it through in detail with your accountant.
