Confused! GST, CGT, none or both?

Okay. I'm very confused. A quick run down:

My partner and i purchased a 4 bedroom house in 2013. The house was on a large block and came with plans for sub division of the block (1 into 2) and plans for a new house to be built on the new block.

Tenants moved straight into the existing house as we intended on building the new house (once the block was subdivided) and this becoming our PPOR.

We were struggling for capital and thus sold the exisitng house (half way through building the new house) to free up funds to finish our PPOR.

We have now completed the new house and plan to live in it for 6 months. With the market being so strong we are considering selling once the 6 month period is up.

This is the first house we have ever purchased.

My questions are:

- are we liable for GST or CGT on the sale of the new house?
- i assume we will have to pay CGT on the original house as we never lived in it?
- are there any other tax considerations we should be looking into?

Feeling very confused and any help would be greatly appreciated!

Thanks

Dan
 
Daniel

There is no substitute for personal tax advice. You might not post on a forum for medical advice so tax is much the same. That said:

Your case is a complex issue for CGT. It appears you have THREE CGT assets.
1. The original house and land
2. The original portion of land for the proposed build
3. The new home on 2.
CGT laws determine whether 2+3 can be combined but its likely they may be separate assets.

Issues :
#1 cant satisfy the main residence exemption as it was occupied by tenants from day 1. This is a asset subject to CGT. The sale of asset one is subject to CGT. No GST as its not "new residential". You would need to apportion the value of the property so that separate reasonable values are given to 1 and 2 to apportion the original acquisition cost. That may need assistance.

The new build may be subject to GST BUT...I cant ascertain this from your post. This is an issue where personal advice is needed. When the house is sold there may be no CGT (exempt) or there may be income tax. It cant be ascertained from your post.

I wonder what you mean by the 6months...Why is six months so relevant in your opinion ??
 
Hi Paul,

Thanks heaps for the reply. We have definitely learnt the hard way that tax advice is best sought out prior to purchasing. We will know for next time!

We assumed that we would have to pay CGT on the original house as it was tenanted.

If our original intention was to buy the house with the purpose of building a PPOR on the subdivided portion of the land i don't understand why we would have to pay either GST, CGT or income tax. We thought that as the new house would be our PPOR we were exempt from any form of tax?

In regards to the 6 months i thougt that was considered a rough guide as the minimum amount of time one must live in a property to be considered there PPOR? Tax is so frustrating there never seems to be a definitve answer!

Thanks

Dan
 
Hi Paul,

Thanks heaps for the reply. We have definitely learnt the hard way that tax advice is best sought out prior to purchasing. We will know for next time!

We assumed that we would have to pay CGT on the original house as it was tenanted.

If our original intention was to buy the house with the purpose of building a PPOR on the subdivided portion of the land i don't understand why we would have to pay either GST, CGT or income tax. We thought that as the new house would be our PPOR we were exempt from any form of tax?

In regards to the 6 months i thougt that was considered a rough guide as the minimum amount of time one must live in a property to be considered there PPOR? Tax is so frustrating there never seems to be a definitve answer!

Thanks

Dan

I'm not saying one way or the other. You original intention appears to have contemplated a subdiv for purposes of making profit - Likely to reduce debt. OK it changes a little BUT the ATO don't share that approach. A recent case saw the original intent continue and its dangerous to assume that because you lived in a new home its not subject to GST after its newly built when you intent was to subdivide.

You may have undertaken an enterprise if the expected outcome was to subdiv and sell a portion for profit. Profit includes a reduction in a debt by paying down a loan too according to the ATO. Now you seem to have switched which portion. That doesn't really change the nature of the enterprise. Perhaps confirms it. So GST may result from a sale of new residential premises. There is a FIVE year window - Not 6 months.

Now if GST does apply perhaps there are ways to save a fortune....ABN application, claiming GST on build costs and using the margin scheme maybe.

Alternatively it may not be a issue.

A big difference in the opposing views. Get it wrong and its a costly mistake.

There is no 6 month rule for the main residence exemption. In theory it can be a day, a week etc. More of an issue arising is how you apportion the cost between two properties, GST and even just conventional income tax. Being a main residence relates to CGT...Not GST and not income tax if there was an intent to profit.
 
Thanks Paul and Terry,

So based on your replies it seems that we would be liable for both GST and the profit would also be taxed according to our income threshold. What a rort! This would basically halve the profit!

So my understanding is GST is avoidable if we hold for at least 5 years. This is a possibility for us.

Is there anyway of avoiding paying the tax as a result of the profit being considered income or will we be paying this whether we sell in 6 months, 5 years or 20 years?? And is this influenced by whether we live in the house or rent it out?

We are happy to see an accountant but i'm just wondering if we did that would we get specific answer to these questions or will it still be a heap of hypotheticals?



Cheers

Dan
 
Thanks Paul and Terry,

So based on your replies it seems that we would be liable for both GST and the profit would also be taxed according to our income threshold. What a rort! This would basically halve the profit!

So my understanding is GST is avoidable if we hold for at least 5 years. This is a possibility for us.

Is there anyway of avoiding paying the tax as a result of the profit being considered income or will we be paying this whether we sell in 6 months, 5 years or 20 years?? And is this influenced by whether we live in the house or rent it out?

We are happy to see an accountant but i'm just wondering if we did that would we get specific answer to these questions or will it still be a heap of hypotheticals?



Cheers

Dan

That worst case. The advantage of personal advice is its not hypothentical. Its calculations and guidance so that your circumstance is understood. It may include suggestion to seek a ruling that confirm the ATO views. It would result in clarity BUT with saving $ in mind. Its equally as bad to overpay or underpay tax.

And yes there are strategies to change tax impacts. For example if you reside in the home for five years when its sold NO GST would occur no matter what and its eligible for an exempt CGT event. All part of the advice.
 
Thanks Paul and Terry,

So based on your replies it seems that we would be liable for both GST and the profit would also be taxed according to our income threshold. What a rort! This would basically halve the profit!

welcome to the pain that property developers experience all the time. If $100 is made on a deal spanning more than 12 months and you have a passive investor on 50% tax rate and a developer on a 50% tax rate,the after tax profits are:

Investor = $100, reduced by half, @ 50% = $25 tax, net $75

Developer = $100 less GST = $91, @ 50% = $45 tax, net $46
 
Thanks Paul and Terry,

So based on your replies it seems that we would be liable for both GST and the profit would also be taxed according to our income threshold. What a rort! This would basically halve the profit!

So my understanding is GST is avoidable if we hold for at least 5 years. This is a possibility for us.

Is there anyway of avoiding paying the tax as a result of the profit being considered income or will we be paying this whether we sell in 6 months, 5 years or 20 years?? And is this influenced by whether we live in the house or rent it out?

We are happy to see an accountant but i'm just wondering if we did that would we get specific answer to these questions or will it still be a heap of hypotheticals?



Cheers

Dan

As Paul said that is the worse case scenario and it will all depend on the situation and how you conducted the process.

Why not book a consultation with Paul and work through the issues and at the same time plan ahead for the next one so as to reduce tax as much as possible.
 
+1 for getting professional advice in such complex matters.

Met with Paul today and after running all the figures it ended up being an easy decision. If anyone needs some guidance i would highly recommebnd him.

Cheers

Dan
 
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