Ask Ban Tacs Question
I have a rental property that I purchased over a decade ago for the purpose of renting out, and it has remained occupied for the duration of my ownership. It was purchased in my own name, I do not have an ABN, and I am not registered for GST.
It has now reached the point where I would like to sell, and upon assessing my options for the property, I can now see that I could best realise the property’s potential by undertaking a substantial renovation of the existing house, obtaining development approval for subdivision into two lots and construction of a new house, and carrying out the works. Note that the development approval would be for both the subdivision and development of the new house (i.e. combined permit); I cannot obtain subdivision planning approval alone, however I would be able to complete the subdivision (i.e. titles issuing) before commencing the new build. Alternatively, I could obtain planning permission, build the new house on the existing property, then subsequently subdivide.
My preferred option, Option A, would be to undertake the following:-
– Renovate the existing house (substantial renovation; needs to have commenced prior to lodging planning application for development approval)
– Lodge and obtain planning approval for the subdivision and construction of the new house
– Subdivide the property
– Sell the existing house
– Build on the new allotment, and either sell the new dwelling, or retain as a long term (5+ year) rental property
Other options are:-
Option B: As per Option A, but building the new house before subdividing the property
Option C: Undertake the renovation, obtain planning permission, and sell the property complete (i.e. with planning permission for future subdivision and construction of new house; a developer might buy it)
Option D: As per Option C, but complete the subdivision, and sell the existing house and the newly created vacant lot separately
Questions as follows:-
1. If I undertake my preferred option (Option A), would I cross the line of being considered a developer? If so, at what point is that line crossed?
2. If the line has been crossed with Option A, which of the other options could I complete without me being considered a developer?
3. I am currently renting myself, and could move into the existing house as a principal residence prior to commencing the project. Would this help or hinder me with respect to being considered a developer?
4. If I moved into the property as a principal residence prior to commencing renovations, would this enable me to reset the cost base for CGT? Or am I best undertaking renovations to the existing house whilst it is considered to be a rental property; keeping in mind that I wish to sell this existing house; either straight away (if considered a rental), or perhaps after 12 months (if considered principal residence).
5. I could also move into the new house prior to either selling or renting it out (i.e. build it as a principal residence). Would this assist me in any way?
6. At what point(s) in this journey should I obtain formal valuation(s), to best optimise the apportioned cost to each property for CGT purposes?
Answer
There is probably more information you will need than the following and I appreciate the offer to pay more. What I am trying to do below is get you started, narrow down your path and then when you consider your options we can talk further either by zoom or another askbantacs.
The main test here is how business like are you? Building a house to sell is most likely to be a business – profit making enterprise. Once you cross this line you will have to register for GST and the profit will be taxed as normal income. The capital gain on the property that has been made up to the date it was committed to the business can be taxed with the 50% CGT discount but it will mean triggering CGT event K4 by transferring (nothing to do with title just a notional transfer) the property to the profit making for sale purpose at market value at that date. This means that CGT is triggered at that date so you need to have some cash to pay the CGT even though you do not have sale proceeds. You do have the option of transferring at cost to avoid the early CGT but that means no 50% discount only any of the gain.
If your business turnover exceeds $75,000 you need to register for GST (does not include domestic rents). Merely realizing an asset is not caught as business turnover. So again you can see it is all about the line of changing from simply owning an investment property to a profit making activity. The renovation is a fine line, because you have had the property for so long but the building of the house pushes you over the line for sure. You could be considered to merely be tidying the old house up to get the best sale price, instead of being business like. A good guide on this fine line, at least for GST purposes is GSTR 2003/3 https://www.ato.gov.au/law/view/document?DocID=GST/GSTR20033/NAT/ATO/00001 Which explains when a renovation is substantial. It needs to affect all of the house.
Only the first sale of a new or substantially renovated home is subject to GST. Vacant land is subject to GST. But all of this is conditional upon the owner being registered for GST or required to be registered for GST ie so business like – there is a turnover from the sale of property for business not investment. As stated above the activities of substantially renovating rather than readying for sale or the building of a home will push you over that line. Consider that the mere sale of vacant land and a freshened up house may not. As long as you do nothing more than the basics council require to divide the land. Plenty of discussion on this matter in our how not to be a developer booklet https://www.bantacs.com.au/booklets/How-Not-to-Bea-a-Developer-Booklet.pdf
Note, if GST applies you will be entitled to use the margin scheme which means that GST will only be payable on the difference between the selling price and the original price you paid for the property. You will also be entitled to claim GST back on all the building and renovation costs. So it really boils down to losing 1/11th of your profit. You are going to sell the houses for the same amount regardless of whether GST applies or not. If you decide to not get too business like and just sell vacant land and a freshened up house consider that you will not be able to claim back 1/11th of the costs of preparing them for sale ie subdivision, paint etc. Fortunately, you are good with numbers.
Once you have held a property as a rental for more than 5 continuous years it is no longer new so GST will not apply to the sale of either property. Note the 5 years start from when you rent it out of course but only if you have not claimed GST input credits for the work done. In other words you can’t have the best of both worlds. Claim the GST during construction then hold for 5 years and not pay GST on sale. The 5 year period only starts once you pay back any GST you may have claimed during construction.
In theory the 5 years is not required if you build the property to live in because it is not built in the furtherance of an enterprise but the onus of proof is on you.
Option D has merit tax wise if you can keep the reno of the existing house away from being substantial, refer GST 2003/3. Similarly option C. I don’t like building as it adds an extra layer of risk to the venture though at least you have an insider advantage.
Your profession will work against you but it is just one of the many factors and you are over the line anyway if you substantially renovate or build.
Now some really basic answers to your question list
1. If I undertake my preferred option (Option A), would I cross the line of being considered a developer? If so, at what point is that line crossed? Yes – substantial reno to sell or building house to sell
2. If the line has been crossed with Option A, which of the other options could I complete without me being considered a developer? Probably d or c if you don’t go too crazy on the reno
3. I am currently renting myself, and could move into the existing house as a principal residence prior to commencing the project. Would this help or hinder me with respect to being considered a developer? Help but would compromise scaping, which is probably only a minor consideration.
4. If I moved into the property as a principal residence prior to commencing renovations, would this enable me to reset the cost base for CGT? No
Or am I best undertaking renovations to the existing house whilst it is considered to be a rental property; keeping in mind that I wish to sell this existing house; either straight away (if considered a rental), or perhaps after 12 months (if considered principal residence). Consider what renos can be claimed as repairs – if so need to be done in year it earns income and apportioned to remove % that represents your private use that year.
5. I could also move into the new house prior to either selling or renting it out (i.e. build it as a principal residence). Would this assist me in any way? Yes quite a bit but I would like to see you stay there for a long time.
6. At what point(s) in this journey should I obtain formal valuation(s), to best optimise the apportioned cost to each property for CGT purposes? When and if you go over the line to become a developer.
Hopefully, that gives you something to work with and start on the numbers but is not the end of the discussion. Add to your options doing less than a substantial reno, subdividing and selling old house then building new one for you to live in until unforeseen circumstances force you to move.
