Redeveloping Principal Place of Residence

Question

We are planning to knock down our principal place of residence (purchased Dec 1985) , build 2 townhouses, move into one and sell the other. If we sell the one we don’t intend to live in ‘off the plan’ before we knock down the existing residence can this sale be CGT and GST exempt by considering the CGT event at the time the ‘off the plan’ contract was signed and relating it to the original house. [ We understand there will be CGT applicable for the land underneath the townhouse we actually move into ]

Answer

I am so glad you asked this question as you are in a very difficult situation CGT wise. Unfortunately, because you purchased your home after 19th September 1985 (it works on date contract was signed) the property is exposed to CGT. And because you purchased the property before August 1991 you are not allowed to increase the cost base of the property by holding costs such as interest, rates, insurance, repairs and maintenance. This means that if CGT were to apply to your property there would be a huge amount of tax payable and really it would just be a tax on inflation.
The main residence exemption applies to the dwelling the land is only covered because it is attached to it. It cannot apply to vacant land unless the house has been accidentally destroyed. So if you demolish the home you demolish your main residence exemption retrospectively. This is it, gone even though you may have lived there for 30 years. This is what the law say but the ATO has made a concession in ID 2003/232 https://www.ato.gov.au/law/view/document?docid=AID/AID2003232/00001 Note this is a concession, not law and they could change their mind at anytime. Further you would need to make sure your circumstances were exactly like the situation in the ID ie that you have never rented the property out. ID 2003/232 allows you to utilise section 118-150 to treat your old home and the townhouse as if they are the same property providing you move into the townhouse as soon as it is finished and cover it with your main residence exemption for at least 3 months after moving back in. Of course you cannot cover any other property with your main residence exemption for any time prior, that you owned this property
SO if ID 2003/232 is still there when you sell your town house the sale proceeds will be exempt from CGT because of your main residence exemption. The profit on the other townhouse will be taxable going right back to 1985. There will be two calculations the gain from 1985 to the start of the project will qualify for the 50% CGT discount, the gain after that will be normal business income ie no discount. GST will apply and you will benefit from using the margin scheme so it is important that you put a margin scheme clause in the sale contract.
Selling off the plan while the house is still on the land will not work, you are not selling them the house and the main residence exemption is attached to that dwelling. Crunch the numbers it may be worth the stamp duty cost of selling the property to another entity you control then developing the property and selling one of the townhouses back to you. Or it may just be better to apply for the DA to maximise the value of the property and sell it to a developer. Developments are risky

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