I will try and be clear but there’s a few parts to my question. We live in Brisbane, renting at the moment as we’ve recently sold our PPR in Central Qld. Approx 6.5 years ago we bought a house in Victoria intending to retire there in the future. It has been rented out since then. However, after a year or two we decided to subdivide the block & build at the back with the intention of living in one house and renting out the other. This has taken more than 2 years to just subdivide and now the build is going to start.
We are now retired and want to come to a decision as to where to live. So, my questions are:
1)If we move into the older existing house & state it to be our PPR what is the situation when we finally sell it regarding CGT? To complicate matters we may have to move back up to and live in Qld for family reasons. If that was the case we’d probably rent out this house again.
2)If we put the new house up for sale once it’s built rather than rent it out can we include the subdivision costs in the overall costs before calculating profit. Also, do we qualify for 50% CGT on it as it’s happened over quite a few years and we’ve owned the land for more than 6
years? The reason we would sell it is if we have to move back to Qld, our original intention being to rent it out.
I’d appreciate your guidance on this.
It is all about proving your intentions when you started the project and then you can be considered to have changed your mind and still caught. If you build the house with the intention of selling it then it is a business, GST applies and no 50% CGT discount. It is a question of whether you can prove your thoughts. So even if you could prove that you originally intended to rent the house out. If you are now about to start the building stage and have decided to build it to sell then you have changed your mind and have commenced onto a business venture of constructing a specie.
If the owner of a property is registered for GST, GST will apply to the first sale of a house and land unless it has been held as a rental property for a continuous period of 5 years. Whether the owner is required to be registered is determined by whether they are in business with a turnover of supplies subject to GST that exceeds $75,000. So, this all revolves around whether the sale of the house is part of your business turnover and it certainly is if you built the house with the intention of selling.
The trap is if you donâ€™t put a margin scheme clause in the contract you are going to have to pay more in GST and you can only put a margin scheme clause in the contract if the sale is subject to GST ie you are admitting you are in business. If you donâ€™t put the clause in and the ATO come along later and decide GST should have applied it is very very difficult to apply the margin scheme retrospectively.
So, unless you have kept the property as a rental for 5 continuous years before you enter into a contract to sell it, you should obtain a ruling from the ATO to ensure that GST does not apply. You would need to explain why you have changed your mind from your original intention to rent the property out and be convincing that this change of mind happened after construction of the house had begun. Generally, you would be looking for an unforeseen change in circumstances. The chances of slipping under the radar are very slim because property sales are data matched.
If it is a business venture the profit would be taxed as business income ie no 50% CGT discount. Though you would be entitled to the 50% CGT discount on the capital gain on the land before it was committed to the project.
The sale of the original house on half the property would not be subject to GST and would qualify for the 50% CGT discount. You would start with the original price you paid for the property plus stamp duty and legals. Reduce this by the portion that is attributable to the land that later became part of the new property. Add to this anything associated with the property that has not otherwise been claimed as a tax deduction, for example interest, rates, insurance if you live there, even cleaning materials. Add to this the selling costs. The difference between this cost base and the selling cost is the capital gain which is reduced by 50% for the CGT discount and then included in your tax return. If you do end up living there you apportion the gain between days covered by your main residence exemption and days not to reduce the amount you put in your tax return. Note if you move back out of the old house and live in QLD without owning your home up there, you can continue to cover the old house with your main residence exemption for up to 6 years in your absence while it is rented out. This can also be the case if you do buy in Qld it is your choice then which of the properties you cover for that 6 year period.
The subdivision costs that achieve the separate title are to be split between the two lots as they both get new titles as a result of the subdivision but costs specific to the block such as connecting the water on the new block would only be included in the cost base of the new block.
There are many articles in this booklet that you will find interesting. For example it explains how the margin scheme works. http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf
This answer gives you food for thought. I strongly recommend when you decide what you are going to do that you run it by your Accountant.