Substantially Revovating or Building& Living There,Before Selling…Scot-free?

Question

Entirely- contrary to Newsflash 8Feb.2008 now_ Ihave it upon -warranted! advice , that-with a prior profit making intention , the main residence exemption -CAN_ be available (Duplex Proposal Finding 4.12 Bantacs Ninghi , financed by me). Associated Duplex Finding 4.1, 4.2 seem contrary , to also How Not To Be a Developer Booklet (definition of substantial renovations P12 ) thats saying if the (next) property you (gst registered ) renovate , is not a substantial renovation , you cannot claim the input credits and dont charge gst on sale .At P 13 , it makes clear substantial is (eg floor board replacement ) something affecting every room ,which my duplex proposal is not doing .Duplex Proposal Finding (at 4.2) states capital gain is payable on the half being partially renovated , something , Im happy with but apparently , needs -now confirming .?
( If in the absence of an interim law change , my Finding has been in error all along , as supplied by Ninghi -will Bantacs provide a complimentary duplex proposal revision please (as requested letter April 2 2008 ) also rebate this query fee -OR , better still apply it to putting -enough – starch into the Feb 8’s "NO" for these other people in the property market to realize they can -no longer – keep it, this slippery issue-to give it oxygen at all ,ongoing . Although its not our job to inspire tight tax law , I merely need to fully understand – how loose – precisely , ongoing the current position really is ?)

See, correspondingly I’m interested to learn WHERE ? the Feb 8 article , believes people in the property market with a profit making motive are vulnerable , flitting from new house to new house , 13 monthly .Goods& Services Tax Booklet (GST & New or Renovated Houses P32 ) says if the house was built to live in , the seller would not be required to be registered for gst , so gst does not apply on the sale being unregistered and theres no input costs .Such unregistered people claim it wasnt even built with intention of resale , let alone for that fortuitous profit ,and return neither gst on the sale nor income tax on the profit .Despite turnover over $100,000 , they tell you they are not required to register for gst , because it was built to live in , and it is not business turnover .When its suggested their typical , virtually annual- house move – is for profit and its "trading" , they typically claim it was actually for social factors (noisier neighbours, heavier traffic etc ) TD 92/135 isnt explicit with people claiming only plausable social reasons for moving .Is their well rehearsed operation merely under the radar during an interim ( ATO doesnt seem to object ) oR absolutely bullet proof – with ATO s benefit of hindsight , after 2 0r 3 moves in 4 years.? Or does ATo , in effect , require a corresponding change of employment venue -outside of daily commuting distance – not lesser social excuses, before allowing first sale of a new home GST free and granting main residence exemption /no income taxing of their annual profit .?

Answer

I can only advise on how the law applies to your facts not what the facts are. The CGT laws can only apply if normal income tax law does not. Therefore the main residence exemption can only exempt a property that is caught by CGT. A property will be caught by income tax if it is purchased with the intention of resale at a profit. If you purchase the property to use as your house it will not be caught by income tax. It is not for the ATO to tell you what your thoughts were but nevertheless the burden of proof falls on the taxpayer. If you say you did buy the property with the intention of doing it up and selling it for a profit then you are involved in a profit making scheme and would pay tax on it just like any other money making venture. If on the other hand you say your primary motive was to provide a home for yourself the answer would be tax is not applicable. It is not a rule of how many times you can do this it is simply based on the reason you purchased the property. So you need to be careful of your thoughts
The situation is very similar for GST. If your business’s turnover of taxable supplies is more than $75,000 then you are required to be registered for GST. So if this property is part of what your business sells, you will be required to register and charge GST. That is if it is a taxable supply ie the first sale of a new house or a substantially renovated one. If the sale is not part of your business’s turnover then you are not required to be registered for GST so no GST would be charged on the sale.
Note if you renovate a house to sell at a profit and have bought it with that intention but it is not a substantial renovation then it does not contribute to your business’s turnover of taxable supplies so will not push it over the $75,000 mark so you will not have to register anyway. This is discussed in the ATO’s ruling MT 2006/1. There were two drafts before this ruling was released, the ATO’s opinion varied dramatically between these two drafts. The advice you got from our Ningi office in 2005 would now be out of date.

The report you received from the Ningi office only stated that the main residence exemption applied to the side of the duplex that you had the intention of living in permanently. The main residence exemption could not apply to the other side. As to whether income tax or CGT applied to the other side of the duplex depends on whether you renovated that side with the intention of selling for a profit or to rent out.

I am sure many people do fly under the radar but that is up to the ATO. The ATO may feel it is not worth the trouble to try and argue with people what their thoughts were or maybe such scrutiny of people’s living arrangements would be bad for the government. Our aim is to inform people where the line is so they don’t unwittingly get caught out or if necessary correct their thoughts!!!

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