Tax, GST And A Builder’s Home

Question

I bought a house in NSW with a vacant block adjoining in September of 2018. The block was on two separate titles but purchased from the one vendor.

It was purchased solely in my name.

We have lived in the house since purchase and have now decided to renovate the house we are in to suit our growing family better. We will then look to build a bigger house on the block adjoining with the long term intention of selling the old house and living in the new house.
– My husband is a licensed builder
– I have my owner builders licence

We are trying to work out which way or in what time frame we need to do this in order to minimise or avoid our capital gains tax and how long would we need to live in the new house before we could sell it?

We own a building company of which my husband is the director and I am a shareholder/employee.


Answer

This is a really nasty area, it is a matter of proving your thoughts and the onus of proof is on you. To set the scene have a quick read of this ruling https://www.ato.gov.au/law/view/document?docid=TXD/TD92135/NAT/ATO/00001 It is difficult for a builder to argue that they didn’t build or renovate a house with the intention of selling at a profit.

So the first thing you need to be able to prove is that there was no profit making intention when you bought this property in the first place. Were you married to a builder in 2018. I will assume you were. So we are looking all the way through for a convincing reason for your actions that had nothing to do with making a profit. The worse case scenario the ATO could argue is you bought a home that did not suite your needs but had profit potential, simply lived there because it was convenient while you renovated with the intention of resale at a profit. Then moved into the specie to try and cover it with your main residence exemption while you finished it off and found a buyer. The onus is on you to prove this is not the case. Time helps but is not a guarantee. Have a listen to McCurry’s case

https://www.youtube.com/watch?time_continue=10&v=usW1zL6QwdA&feature=emb_logo
Then there is case R51 84 ATC 392 a builder who built a block of flats and leased them to tenants for 6 years was still assessed as revenue on the profit on the sale. If income is on revenue account then the CGT provisions don’t get a look in. It is taxed as normal income first. If the CGT provisions do not get a look in then the main residence exemption cannot apply.

The point is it is not time it is whether you had profit making intentions. Time helps but is not a guarantee.

Now here is something even more scary, GST. If you substantially renovate (affect every room) a property for resale at a profit it is subject to GST. The first sale of a house is also subject to GST if it is constructed for resale at a profit. Here is an example from MT 2006/1 https://www.ato.gov.au/law/view/document?DocID=MXR/MT20061/NAT/ATO/00001


Example 29

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.

The reason this is more scary is because the ATO can come along later and ping you for GST on 1/11th of the sale price. Now both these sales would qualify for the margin scheme meaning GST would only apply to the difference between the original cost and the selling price. But if you don’t put a margin scheme clause in the contract then it is very difficult to try to use it later. If you do put a margin scheme clause in the contract then you are admitting to GST. Further by the time the ATO catch up with you, it might be too late to claim the GST input credits back on the reno and building.

Now with the CGT main residence exemption you may think I will take my chances and pay the tax if the worst happens but the GST issue means you will be up for a lot more tax than you would have had to pay in the first place. So my recommendation is that before each sale you obtain an ATO ruling, allowing you to sleep nights and make sure you at least minimise the consequences. As a general score card on these rulings, when it involves somewhere you have genuinely lived with your family you should be fine. They mainly pick on rental properties where taxpayers are arguing they built them to hold as a rental so the 50% CGT discount should apply on the sale claiming it is not business income.

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