Subdividing and Build a New Home Then Sell Off Old One

Question

I purchased a property in Melbourne in 2015, for $600k, due to its large backyard and proximity to schools, transport etc. The house was in very poor condition, with other similar houses selling for closer to $450k at the time. We moved in asap after settlement.
We have made renovations and small extension to the existing house during the last 5 years. The renovations also included building a new workshop.
The old house is great, but we would like to build something more efficient, modern and “newer”.
Approx 3 years ago (long after we started renovation), we found out that we can subdivide the block without bulldozing the existing house. Sat on this for some time. In 2020, we went ahead with the subdivision and this has been approved. The subdivided rear block has ended up with an old shed (1980s), plus the workshop we built prior to subdivision.
The vacant block (with old and newer shed) is worth about $450k
Front house on reduced block worth approx $850k.
I am not a builder.

Option 1 – Preferred.
Sell front house CGT Free, as it is our PPR. I assume to questions or doubt here.
I am comfortable with not having any intention to subdivide, or make profit at purchase time.

I would then like to Build a new house as PPR in back block.
Have slight trepidation on the details involved with creating a new house, GST etc.
I am comfortable, but not sure about the rules that trigger a “1 off transaction for profit intention”?

My intention is live in the new house, as my PPR.

Real Life Facts:

1. 1) With growing families, kids off to high school and leaving home, I will sell that house within 5-10 years. Nation average for changing house is just under 5 years now?
2. 2) It’s Melbourne, it’s a reasonably nice suburb. It would be naive and silly to not be aware of the fact that when I sell this house, whether it is 3, 5, 7 or 15 years, I will make a gain.
3. 3) No one is indifferent to making a gain. No wants to or expects to make a loss. Banks would not lend if you expected a loss.

Question 1: How many times do I have to satisfy NOT Having a profit intention or enterprise.

1. 1) At Purchase
2. 2) At Subdivision
3. 3) At building of new PPR house.
4. 4) At sale of new PPR after 5 years.

Sub question 1b) Given that apart from the odd year in 1991, GFC or Covid, or rare mining town collapses, almost everyone who buys a house, expects to and aims to make a gain on eventual sale, its pretty hard to avoid or disprove that. It may not be a primary or main aim, but its still an intention and an expectation????

Question 2: Could you confirm that assuming I do not trigger a “1 transaction enterprise or developer rule”, it is sufficient to:

1. a) Live in the new house for 5+years, then sell
2. b) Live in the house for lets say 4 years and rent out house for 2+ years, then sell (CGT Free under 6 year rule)
3. c) If I sold house before 5 years, is the trigger automatic for GST and the floodgates that this brings?

Answer

I can see you have been reading up on this. Yes I agree selling the old house would be the same as any other sale of a main residence, all tax free.

The back house will be fine as long as you don’t sell for a long time or have an unforeseen change of circumstances with lots of supporting evidence that you had intended to stay there as your home. Five years would be a very safe time to live there providing there is nothing contradicting your intentions. Though the ATO will hold against you any promise to the bank to sell the house after construction in order to obtain finance. Or trying to claim GST input credits on the construction.

The first 3 points are when you would be tested for a profit making motive i.e. purchase, subdivision and build. At all three of those points you have another clear dominant purpose. It’s about your dominant purpose, which is clearly to provide a home for your family. Even if you subdivided with the intention of selling off the back vacant land GST would not apply by this time as you would be merely considered to be realizing an asset. The catch would be going further than that by getting business like in building a house to sell. It is not business like to build a home to live in just need to be able to prove that is your intention and the best proof is time.

Ok question 2 which I didn’t read until I answered question 1 above so we are on the same page with the 5 years. I picked 5 years because for GST purposes a house is no longer considered new residential property (only new residents are subject to GST) once it has been held as a rental for a continuous period of 5 years. There is no such carve out for your home but that is really because that doesn’t even get a GST look in. So first point here ATO considers a 5 years a threshold that shows the property was not built for sale and or is no longer new. Not written in stone but a good benchmark.

The next point is whether you are required to register for GST

Section 23-5 states that if the annual turnover of supplies you make in the normal course of your enterprise, exceed $75,000 you must register for GST. Section 185-25 excludes from the calculation of annual turnover the supply of a capital asset. So even if the house is still considered a new residential property so subject to GST on sale the question is still whether you are required to be registered for GST. If it is the sale of a capital asset you are not required to be registered because you have nothing that counts towards the $75,000 turnover test. So still this comes back to your dominant intention being to build a home for your family to live in not for the purpose of resale. A question of fact that the onus of proof is on you. But you are looking good having lived there for 5 years

Now to CGT and the main residence exemption.

Having got past all the above and concluding that you are merely realizing and asset on both these sales, no busines profit making motive. Then and only then can the CGT rules apply because otherwise it would be considered business income. These CGT rules give you the 50% CGT discount and the main residence exemption. With only minor exceptions you can only cover one dwelling at a time with your main residence exemption. It revolves around the dwelling and land attached to it. So in order to sell the first home completely tax free you are exposing the land associated with the second home to CGT for all the time up until you can cover it with your main residence exemption. You can cover that land with your main residence exemption once you stop covering the old house (section 118-150 allows vacant land to be covered for up to 4 years). There is no market value reset it is all about a pro rata calculation when you eventually sell. This means you need to keep good records for the new house and the back block right back to the date of original purchase. There is no avoiding the fact there will be a CGT calculation on the sale of the new house but the better your records the less it will be. Section 110-25(4) allows you to include in the cost base repairs, maintenance, rates, interest, insurance etc. Maintenance even includes cleaning materials, lawn mower fuel etc. Keeping receipts is so important.
Note regarding paying more for that house because of bigger block or subdivision potential. Merely buying a home to live in with an idea that one day you may be able to build your dream home at the back is not a give away to profit making. If you wanted into that area and couldn’t afford a new home at that stage.

In short good chat but I think you will be fine as long as you are really going to live there.