Subdividing and building a new home in the back yard

Question

I bought my property on 23/1/1995 for $200K. I have lived in the house on this property ever since. The current value of the property is $1,600K. I have developed plans for a two-lot subdivision and plan to build a new house on the rear of the block behind the existing house. The cost to build the new house will be $950K.

The plan is to live in the old house while the new dwelling is built at the rear, then move into the new house and subsequently rent out the old house at the front of the block to produce an income. The object is to leverage the PPR exemption in a way that eliminates any CGT liability on the new dwelling and its land that will become our principle place of residence, while quarantining the original dwelling and land from any CGT liability from the time of purchase up and until it is leased out to produce an income, at which point it becomes liable to CGT.

The following sequence is planned:

Sept 2019: Move into the new dwelling as our PPR (no subdivision has been processed).

Sept 2019: Obtain a sworn valuation for the original dwelling and it’s reduced land footprint as per the council approved plan of subdivision.

Sept 2019: Lease the original dwelling to produce an income (still no subdivision has been processed).

June 2020: Apply for new title certificates with Land Use Victoria, thus completing the subdivision.

This plan is reliant on resetting the CGT cost base for that part of the subdivided property on which the original dwelling still stands and assumes that the subdivided property containing the new dwelling retains its PPR CGT exemption status from 23/1/1995 until sold.

Does this plan meet the objectives set out above to confine any CGT liability to the subdivided property containing the original dwelling from September 2019 when it is first leased out?

Answer

It just can’t be done. TD 2000/14 does allow you to cover the land under the new house for 4 years before you move in but only at the expense of exposing the old house and that still won’t get the new house back to 1995 so it is always going to have a sleeping CGT record keeping nightmare. Be aware of Section 110-25(4) ITAA 1997 that allows you to increase the cost base by any holding costs that have not otherwise been claimed as a tax deduction. This means even keeping your woollies receipts for cleaning materials.

You are talking about using section 118-192 http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.192.html

in particular:

There is a special rule if:

(a) you would get only a partial exemption under this Subdivision for a * CGT event happening in relation to a * dwelling or your * ownership interest in it because the dwelling was used for the * purpose of producing assessable income during your * ownership period; and

(aa) that use occurred for the first time after 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996; and

(b) you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time ) it was used for that purpose during your ownership period.

It is pretty much accepted by both sides of the argument that this reset can only apply to the old dwelling. The land with the new dwelling does not have the old dwelling on it when it is sold. You can see that this section looks forward to the eventual sale. This section is not a locked in reset. It is a case of if all these conditions are met when you sell then you can consider this section.

There is not even a choice to not cover the old home so that you can cover the new home all the way back to 1995. The law doesn’t allow that at all. There was a concession in ID 2003/232 but that has since been withdrawn. You could consider going for a private ruling quoting this but remember ID 2003/232 had no basis of law it was just a concession so chances are low and the downside would be paying all that CGT on the old house.