I have read your very informative booklet"How not to be a developer"
and would like your advise on our project in regards to GST,CGT and p.p.o.r.We purchased our house in 1969,it has been our p.p.o.r.since then.In order to downsize as well as to finance living expenses we intend building a house at the rear of our dual street frontage block.For the size of the block,council
planning regulations do not permit a subdivision and selling of the rear block as bare land.Subdivision,either strata or torrens,is only allowed if a complying dual occupancy is completed.After completion we have a number of options available to us and would like your advise in order to more clearly understand the pros and cons of this development.
1.Stay in the existing house and sell the new one.(our preferred option).
2.Stay in the existing house and rent the new one.(no subdivision required until we wish to sell).
3.Move into the new house as our p.p.o.r.and sell the existing one.
4.Move into the new house and rent the existing one.(no subdivision required unless we wish to sell).
Well always you should choose what suites you personally then consider the tax but here are the consequences of each choice.
Because the property is pre 1985 it is exempt from CGT. Even if you subdivide that exemption continues just as long as the ownership ie name on the title doesn’t change. The new house will be subject to CGT or even income tax (no 50% CGT discount) unless you cover it with your main residence exemption. It will only be the new house not the land underneath so it might be reasonable to argue there is no capital gain on the new house if you sell it as soon as it is constructed. Nevertheless, you have a very valuable piece of land there because it is free of CGT so I encourage you to hold onto it as long as possible. If you build the new house and move into it, it will become exempt from CGT because it is your main residence. So my preferred option is you build another house, move into it and rent out your old house. But there are probably lots of other considerations that will affect the return you get on the property, this is just the best tax outcome, in my opinion. Maybe the rent is not enough. I like the 4th scenario because it means no GST. You see of you build that new house with the intention of sell then you must charge GST when you sell. All that means is you will have to give the ATO some of the selling price (you will get GST input credits back on the construction costs) but it won’t mean you can sell it for any more than if GST didn’t apply, effectively the GST comes out of your pocket not the purchaser’s. If you do build to sell make sure you put a margin scheme clause in the contract, there is an article on that in the How not to be a Developer booklet.
Now in answer to your questions:
1) Will have to pay GST and income tax on any profit made based on the land coming into the business of constructing the house to resell, at the market value of the land at date the constructions started. CGT 50% discount can’t apply here because you are business like, you built with the intention of selling, it is normal business income. I can see this is a bit confusing this might be a clearer explanation:
Market value of land at start of construction $
Plus Building and half subdivision costs $
Plus selling costs, interest etc $
Total cost for tax purposes
Less selling price
Taxable profit on construction business
2) This is the second best option, as long as you rent the property for 5 years (or until some unforeseen circumstance forces you to sell) then you won’t have to pay GST when you sell and you will get the 50% CGT discount on any gain made on the house and there is no tax on the gain on the land. But point 4) is no tax at all.
3) No tax on selling the existing house as not built with the intention of selling and pre 1985 asset. And when you eventually sell the new house no tax either but still a shame to sell because it may well be worth twice as much in 10 to 20 year’s time and still no tax on its sale.
4) Win, there will be no tax on either of them when you eventually sell but note you can’t just move into the new house and sell a few months later without GST and income tax applying. The onus of proof is on you to prove that it wasn’t your intention to sell when you built. So unless you have an unforeseen change of circumstances that forces you to sell earlier than planned you have got to stay in that house long enough that a reasonable person would consider that it was your intention to make that your home.