Subdividing rear block & building to sell

Question

We bought a 910m2 subdividable duplex block with an old house on it (Perth suburb), we signed the offer in July 2009 and it settled in October 2009.
We planned to demolish and build a new PPOR
We did not rent out the property.
We demolished the old house in July 2010 and obtained a building licence to build one house on the block.
We positioned the home to the front and left enough room for future subdivision.
Before construction commenced in October 2010, we subdivided the block and attempted to sell the rear block.
It failed to sell, so we took it off the market.
We moved in to live in the front home as our PPOR in December 2011, as soon as it was completed.
Our previous home is now on the market after completing all necessary maintenance and redecorating.
We are now considering building a home on the rear block to sell on completion.
The plans have been approved by council.
The other alternative that we have is to sell the vacant block either as is, or with the approved house plans as a house & land package.
If we proceed to build the house (to sell it on completion), do we need to register for GST, claim back the GST during construction and pay GST on the sale price?
If yes, I assume that we can we use the margin scheme.
Is the profit from this venture a capital gain or income?
OR is it capital gain on the land and income on the building development?

Alternatively, If we sell the block only (or with house plans as a house & land package), is the profit a capital gain?

When we originally bought the block, we saw it as an opportunity to build a new home for ourselves and sell off the back block some time in the future.
We originally thought that we would be able to use the rear block to store our caravan and trailer, however we changed our mind when finances started to tighten up and our income dropped soon after we bought the property.

This is when we decided to try to sell the rear block.

Apart from the taxation issues, we believe that we would get a greater return by building the home as there are more buyers for this completed product than for a vacant rear block that requires vision and an understanding of what can be achieved on a rear block. There may be $50 – $80K more profit by completing the build.
We will also have more control over what gets built there.

The decision therefore may not be made just on the tax consequences, however we would like to know what our tax liability will be before we commence building the rear home.
We have not previously completed any similar developments in our own names.
We have however completed several developments under our family trust structure over the past 15 years.
We lived in our previous home which is now on the market, for 22 years.

Answer


ATO ruling MT 2006/1 and my How Not To Be A Developer booklet (under freebies on the web site) both contain sections that are relevant to your situation if you are interested in further reading.
Your first problem here is naughty thoughts. Unlike criminal law, when it comes to tax law the onus of proof is on the taxpayer. So you need to be able to convince the ATO that when you purchased this property your primary concern was the location of the land being suitable to build your new home and that while you could see the subdivision potential you did not expect to take advantage of that for many years as in the interim the extra space would be useful. The factors that work against you are the fact you are in the business of developing through another entity and the relatively short gap between purchase and sale. Financial needs will help here but only you know how compelling they are. The only way you are going to have certainty here is to put your case to the ATO in a private ruling application.
If the ATO decide your intention from the start was a profit making venture then the sale of the back block or the back block and house are part of the turnover of your profit making venture and as this exceeds $75,000 you will be required to register for GST and charge it though you will be entitled to GST input credits on the construction costs and as the purchase price of the property did not include GST you will be entitled to use the margin scheme. The profit will be taxed as normal income
If the ATO decide your intention from the start was just private in nature then when you sell off the vacant land you will be merely realising an asset and as that realisation is not in the furtherance of an enterprise you will not have to charge GST. The profit will be subject to CGT with the 50% discount but no main residence exemption will apply because there is no dwelling on the property.
If the ATO decide your intention from the start was just private in nature but you then go and build a house on the back block to sell you will have changed the purpose for which you hold the property to a business/enterprise so you will be required to register for GST and charge it on the sale but you can use the margin scheme and you will be entitled to GST input credits on the construction costs. The increase in the value of the land between purchase and the time it was committed to the construction project will be subject to CGT with the 50% discount but any profit from that point onwards will be subject to normal income tax.
Selling the plans with the land would be treated the same as selling vacant land.
If you are concerned about what will be built down the back but after considering the above would prefer to sell vacant land then consider putting restrictions on the title before you sell it.

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