Ask Ban Tacs Question
Having read your books, need some further clarity on my situation.
My PPoR is a pre-CGT asset,(purchased Jan’1984),now mortgage free, we have purchased another property, currently under renovation that we plan to move into as our new PPoR, it will also be mortgage free (in approx 8 months) by the time we move in.
We plan to demolish the old home, sub-divide the pre-CGT land & build a duplex (one side will also have a granny flat) giving us three streams of rental income. The development will be mortgaged (approx $650K)
Q1. Will the total sum of pre-CGT land, when sub-divided maintain its pre-CGT asset status while left in its original ownership ? (owned jointly on title by wife & self)
Q2. My understanding is the new houses (a duplex construction) will be considered by the ATO as a separate post-CGT asset sitting on old pre-CGT asset (the total land component).
Is this understanding correct?
Answer
Too easy, you have done my job for me so I have included a copy of the legislation below. You are correct as long as the ownership of the property never changes then the property remains a pre 1985 asset.
Yes, you are correct that the buildings will be considered a separate asset for CGT purposes, it would be different if you just did some renovations to the old home that cost less than $136,884 for the 2013/2014 year (2015 threshold not yet available).
You will be entitled to claim building depreciation on the new buildings but as a result of this ability to claim you must reduce your cost base by the same amount whether you claim it or not.
When you do sell you will need a valuer to consider what portion of the selling price relates to the house and what relates to the land value. Capital gains will only be payable on the difference between the selling price for the building and its cost base.
Make sure you move into that new PPOR as soon as possible after the renovation is finished and live there for at least 3 months. Section 118-150 will then allow you to back date your main residence exemption on the property to before you moved in providing it is not longer than 4 years. This means getting your personal effects into it and changing all your addresses and of course physically treating it as your home.
As you go through the construction process on for the new buildings make sure there is a direct nexus between the loan and the payment of the builder. Don’t do what Wilma Domjan (it is in the book) did and take the money from the loan and put it in your personal cheque account to write a cheque to the builder. Once it is mixed with private funds the nexus is lost.
Note if one of you were to die then the other inherits half the land and that half would be considered a post 1985 asset from date of death. Accordingly, you might consider divorcing and utilising the rollover relief available to divorcees, but not widows, if one of you are diagnosed with a terminal illness. Don’t know whether I should even mention this but for the sake of completeness….
108-55(2)
A building or structure that is constructed on land that you *acquired before 20 September 1985 is taken to be a separate *CGT asset from the land if:
(a) you entered into a contract for the construction on or after that day; or
(b) if there is no contract – the construction started on or after that day.
Example:
You bought a block of land with a building on it on 10 August 1984. On 1 December 1999 you construct another building on the land. The other building is taken to be a separate CGT asset from the land.
