CGT or income

[drfuzzy]

My question relates to the tax treatment of this proposed arrangement.
The facts:
- I am a fulltime employee not in the building industry
- I have no building or development experience
- I intend to buy a blue-chip property with an old house for just over $1m inc costs in my personal name.
- The old house is dilapidated and would need repairs to be safe to tenant.
- There are plans and permits to build 2 townhouses on the land.

My plan:
- Buy and live in for a few months (for PPOR exemption).
- Move out, demolish
- Build 2 townhouses, need to borrow a significant amount to do it
- Live in townhouse A, rent townhouse B
- Re-evaluate finances after 1 year. If I'm struggling due to interest costs then sell PPOR (hopefully CGT free due to PPOR exemption and hopefully this is not considered ordinary income).
- Then move into Townhouse B. Claim PPOR on this. Live there if I can afford to or move out and rent it. Eventually sell (maybe 2-5 year timeframe, maybe longer).

I like this plan as it appears to me that:
1) Profits from Townhouse A are tax free (PPOR exemption)
2) Profits from eventual sale of Townhouse B will be subject to CGT with a partial CGT exemption and 50% discount for holding more than 12 months. This would make the effective tax rate for the whole development to be very low.

Does this seem reasonable? What concerns me is I might be forced to sell sooner rather than later due to the size of my debts attached. How long would I need to hold/rent/live in both townhouses for before I could look at changing purpose and selling without it becoming income?

Thank you for helping me.

 

[Ausprop]

to me it looks and smells like an enterprise in there somewhere - income tax and GST issues. the first one may be ok, the second looks dubious. why would the second not be the sale of new residential premises?

5 years plus may work??

 

[drfuzzy]

@Ausprop
Thanks for your input. I would have thought if the second townhouse is sold quickly after completion it would certainly be income (although not subject to GST as I am not registered for GST - I think I am correct in saying it would not require payment of this). However as the plan was to rent for several years after which some consideration would be made to possible PPOR or sale only if financially required or some other factor arises - I would have thought this sequence would be enough to show the sale is of either a PPOR or an income producing asset (hence caught by the CGT provisions).

 

[Terry_w]

@Ausprop
Thanks for your input. I would have thought if the second townhouse is sold quickly after completion it would certainly be income (although not subject to GST as I am not registered for GST - I think I am correct in saying it would not require payment of this). However as the plan was to rent for several years after which some consideration would be made to possible PPOR or sale only if financially required or some other factor arises - I would have thought this sequence would be enough to show the sale is of either a PPOR or an income producing asset (hence caught by the CGT provisions).

New residential property is generally subject to GST on its first sale for up to 5 years.

How can you prove that your intention was to hold?

 

[GaryT]

The question will focus on your intention to sell for a profit or keep long term (>5 years) for a rental or PPOR.

If the former than we are talking normal income and you will be required to register for GST.

If the later but after a few years you need to sell for financial reasons then you would argue that because you are not registered for GST and not required to register, then GST on any sale does not apply.

Based on the way you have structured your question my feeling is that the ATO would see the profit motive applying and the sale GSTable and no CGT applying.

Best to see a accountant to discuss in detail.