PPOR, CGT & a development

If i was to buy a PPOR (either DA approved or not da approved), live in it to satisfy the PPOR test and then move out and rent a property (6 year rule) and develop the property, how would this be treated for CG?

Once developed id move back in to satisfy the PPOR test again and then sell the propertys. The only issue id guess id have is the 2nd property (if duplex built) as i couldnt live in both. But say i did not rent the property before the sale?

Would this transaction be CG exempt or would anyway have any idea how this would be treated for tax?

It seems to be a nice way around CGT however maybe i havent considered everything

Cheers

davea,

Have a read of my how not to be a developer booklet, under free publications on www.bantacs.com.au If you buy the property with the intention of developing it you will have to pay income tax ie no CGT discount no PPOR exemption and charge GST. So be very careful of those thoughts. If you buy it as your home and later decide to develop it, because you are putting buildings on the land you will have to charge GST. This would change if you built them with the intention of living in one and renting out the other. Lots to consider but the booklet has all the answers.

julia said:

This would change if you built them with the intention of living in one and renting out the other. Lots to consider but the booklet has all the answers.

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thanks julia, ill have a read of the book when i get time

however what if i developed it to rent both out (and not live in it)...

if you rent it out i guess there is no GST to worry about, CGT would be delayed until sold and it would be treated as a normal investment property...

im guessing deprecation would still be the same as if you bought it yourself from the developer....

until the time you decide to sell it, then the complications would apply...

I'm not so sure about getting out of GST on the second property.....

davea said:

If i was to buy a PPOR (either DA approved or not da approved), live in it to satisfy the PPOR test and then move out and rent a property (6 year rule) and develop the property, how would this be treated for CG?

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Subdivision does not result in a CGT event itself.
Further no sale, no capital gain event and no capital gains/loss incurred

davea said:

Once developed id move back in to satisfy the PPOR test again and then sell the propertys. The only issue id guess id have is the 2nd property (if duplex built) as i couldnt live in both. But say i did not rent the property before the sale.

Would this transaction be CG exempt or would anyway have any idea how this would be treated for tax?

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Its my understanding, and others will be able to confirm, that there is a capital gains event where you sell the subdivided property. You will need to make a reasonable estimate of the value of each parcel of land, based on the land value from the date you acquire the original property.

This will provide the cost base for the property that you will sell. Obviously all costs associated with completing the development that directly relate to the property that will be sold (eg cost of connecting electricity and water) and the apportionment of other costs (eg subdivision application fees, survey fees, legal fees) adds to the cost base. If you sell for more, then the difference is your capital gain.

The date you of the new subdivision is taken as the date you acquire this new property, so if you build and sell in less than 12 months from that date, you don't qualify for the 50% CGT discount.

Trust that helps.

The date you of the new subdivision is taken as the date you acquire this new property, so if you build and sell in less than 12 months from that date, you don't qualify for the 50% CGT discount.

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I disagree with this statement. As stated earlier a subdivision is not a CGT event so there is no deemed new acquisition. The date remains that of the original purchase.

I'm not so sure about getting out of GST on the second property.....

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Mry, my thoughts on the matter are if the intention was always to rent or live in the property then in the later case there is no enterprise and if rented it is input taxed so no need to register for GST any later sale of the properties that were always intended to be rentals would not be a supply as part of the normal turnover of the enterprise so not counted in the $50,000 threshold test to force Davea to be registered so even if the sale is within less than 5 years and in all other ways GST is applicable there is nothing forcin Davea to register so he does not have to charge GST.

julia said:

Mry, my thoughts on the matter are if the intention was always to rent or live in the property then in the later case there is no enterprise and if rented it is input taxed so no need to register for GST any later sale of the properties that were always intended to be rentals would not be a supply as part of the normal turnover of the enterprise so not counted in the $50,000 threshold test to force Davea to be registered so even if the sale is within less than 5 years and in all other ways GST is applicable there is nothing forcin Davea to register so he does not have to charge GST.

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What I am worried about is that the new house meets the definition of new residential property (40-75) because the old property is demolished to make way for a duplex. And the person asking the questions indicates that their intention is to sell. If the intention is to live in I would agree, but she also mentioned that she will only live in one, not the other. If the intention is to rent, she would have to wait five years to sell GST free. And we all know the ATO definition of enterprise sets the bar rather low.

If the intention is to rent, she would have to wait five years to sell GST free. And we all know the ATO definition of enterprise sets the bar rather low.

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If her intention was to rent it and she is not already registered for GST even though she is selling the property in less than 5 years, as it is not a normal supply of her rental property input taxed enterprise she will not be forced to register for GST so she will not have to charge GST

wow,some very detailed responses here...

there would be 2 options...

buy build sell

or buy build and rent

im guessing i would like to see the sides of both of them. If i was building say a 4 building block (not a duplex) i probably wouldnt want to keep all 4, so i would say sell 2 and rent 2 out. So in this case i would pay income tax (on entire profit) and gst...

If i rent them all out, i would need to wait 5 years before selling to avoid gst. CGT would be defered to sale (cost base would be half of land plus building costs, and approtionments).

On the high level ive covered is there anything i missed?

julia said:

If her intention was to rent it and she is not already registered for GST even though she is selling the property in less than 5 years, as it is not a normal supply of her rental property input taxed enterprise she will not be forced to register for GST so she will not have to charge GST

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I don't think intention is going to make a difference here. 40-65(2) makes the property a taxable supply on sale because of the nature of it as a new residential property, and the only way to limit it is through 40-75(2) - which requires 5 years of input taxed supplies being made since the date of the building 40-75(2)(c). I don't see 40-65(1) applying here.

The closest I can see as an example is example 12 of GSTR 2003/3. It is close to the situation because it shows a person building and then selling property built on previously private property constituting a GST taxable sale.

The reason why I say intent won't make an impact here is because the actions are much more developed than just a mere realisation of a property sale, it is an intent to profit with specific activities taking place. Yes it was rented, but the activities go beyond mere realisation as I said, and there are no provisions making it input taxed on sale.

As you say, it is not a normal supply of her rental property, but doesn't that strengthen the argument for GST treatment, not weaken it?

Mry,

I am saying that there is no law forcing her to register for GST if she did not build the property with the intention of resale at a profit becuase her turnover is less than $50,000 so even if she supplies something that is taxable she does not have to charge GST. The $50,000 turnover test does not include sales that are not in the normal course of the business.

I appreciate all your research and will look at it with great interest. I am simply looking at the law that would require her to register.

julia said:

I am saying that there is no law forcing her to register for GST if she did not build the property with the intention of resale at a profit becuase her turnover is less than $50,000 so even if she supplies something that is taxable she does not have to charge GST. The $50,000 turnover test does not include sales that are not in the normal course of the business.

I appreciate all your research and will look at it with great interest. I am simply looking at the law that would require her to register.

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I've always gone by s9-5 of the ANTS 1999 which gives four basic conditions before deciding whether or not an activity warrants registration. I think that (b) is the key here. Well, (b) happens to be the key to everything GST related in property development. I haven't seen the exemption you refer to unless you mean activities that do not constitute an enterprise.

Mry

Section 188-25 excludes from the calculation of annual turnover the supply of a capital asset. If Davea’s intention was to build the property for rental then selling the house is the supply of a capital asset and not included in her annual turnover. Section 118-15 excludes from annual turnover input taxed supplies so the rent she receives is not included in her annual turnover. Section 23-5 requires her to register if her annual turnover exceeds the registration turnover threshold (which is $50,000). Her annual turnover is probably zero. GSTR 2003/3 at paragraph 10 states

10. The sale of new residential premises (whether it is a house or a unit) by a registered entity (for example, a builder or developer) in the course or furtherance of an enterprise it carries on, is a taxable supply.

Also note that all the examples in that ruling first state that the owner is registered for GST.

My argument is she does not have to be registered so she does not have to charge GST even though I totally agree with you that it is a taxable supply.

Its a very fine line. Thanks for that information Julia.

Its a very fine line.

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Oh yeh I love the fine lines. Take it right up to the speed limit.