Ask Ban Tacs Question
In 2004 we bought an old free-standing house to live in after our first child was born. We moved in immediately and remain there. It is the only property either of us have owned that has been eligible for the main-residence CGT exemption.
The house is now very run down and too small (only two bedrooms for the four of us). We are considering demolishing the house and building "semis" (two side-by-side attached dwellings). We will live in one (moving in as soon as it is complete) and rent the other out to supplement our income.
1) If we subdivide the land up-front and eventually sell each half separately, how would CGT be calculated?
a. Would the one in which we would live be fully exempt from CGT as our main residence?
b. Would the cost-base of the rental for CGT be:
i. Half the market value of the property immediately prior to demolition? Including the increase in value from the approved DA or as is i.e. a single residence with no DA?
ii. Half the original total purchase cost of the house and land? Including or excluding stamp duty, conveyancing fees etc?
iii. Half the vacant land value at the date of original purchase? Including or excluding pro-rata stamp duty, conveyancing fees etc?
iv. Something else?
c. Can half of the council rates and the interest paid on the mortgage "to date" be added to the cost-base of the rental? At what date would we perform that calculation:
i. Before we incur any expenses towards the planning?
ii. Immediately prior to demolition?
iii. Once the occupation certificate is issued?
iv. Some other date?
d. Can anything else be included in the cost-base of the rental?
e. Would the remaining undepreciated value of half of all planning and construction costs be added to the cost-base of the rental?
2) Do any of the answers to the above change if we subdivide the land only when we need to sell rather than up-front?
3) Do any of the answers to the above change if we strata-title the dwellings rather than subdividing, either up-front or for sale?
4) How would CGT be determined if we were to sell the dwellings on one title (dual occupancy)?
Answer
This is more than 4 questions, way beyond the scope of askbantacs which states the $69.95 covers one question. If you would like these questions answered in more detail I suggest you book a skype appointment. Here are some of the issues you need to consider. To keep the time involved within the askbantacs range I have touched on the issues and given you further reading. It will get you started but you need more advice before you act, preferably from you accountant who knows your situation in more detail.
http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2003232/00001 Id 2003/232 explains that as the law stands your main residence exemption is lost once you demolish the house but allows you a concession to treat the new house and the old house as the same building if you abide by all the rules listed in this ruling.
Of course you will only be allowed to cover the property you continue to use as your main residence the other side will be fully exposed to CGT (at best if not considered to be in business) with the cost base dating back to its share of the original purchase price. This can be increased by its share of holding costs since then (section 110-25(4) ITAA 1997) such as interest, rates, insurance etc. Basically anything (dating right back to the time you purchased the property, that has not otherwise been claimed as a tax deduction. They are included in the cost base as they are incurred. Same with buying (including stamp duty and conveyancing) and selling costs also construction costs. If the property is going to be a rental then its share of the interest on the loans during the construction period will be an out right tax deduction so not also available for the cost base.
http://law.ato.gov.au/atolaw/view.htm?Docid=MXR/MT20061/NAT/ATO/00001 MT 2006/1 explains when an activity is considered an enterprise, in particular paragraph 273. If it is an enterprise then you have to pay GST on the sale price and you are considered in business so no 50% CGT discount.
Note you can subdivide and sell off vacant land saying you are merely realising an asset and not be considered to be in business ie get the 50% CGT discount and no GST but once you build with the intention of selling you are going to be considered in business.
Our how not to be a developer booklet also has a lot of information on this http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf
There is no chance of using any market value reset to help with the CGT.
All the above would change considerably if you used both sides as your home and then sold the whole property to one person. In this case you could cover the whole property with your main residence exemption but you would of course not get an outright tax deduction for the interest on construction costs. It would not matter whether the title was separate or not as long as sold together.
If you subdivide and sell both blocks as vacant land you will not benefit from any main residence exemption concession at all.
