Demolishing PPOR and building townhouses

G'Day all great Tax Minds,

I would like some feedback on what the CGT implications would be on the following scenario.

PPOR purchased Sept 1997 $146,000

current value $300,000 (at a push)

plan to demolish house and construct 3 townhouses and sell all of them.

costs to construct including all planning, fees, contributions, headworks charges, selling expenses etc. $ 450,000 for the 3.

conservative selling price each $ 340,000

total for 3 townhouses: $1.02 Million

Question is what $amount is to be taxed.

Hi Lotana,

I am so glad you are not my accountant!!!

You actually had me wondering for a second......

...had a bug been detected in my great mathematical mind? I actually resorted to the calculator.....

and guess what $1.02 Million.

I knew this grey matter had some good years still left in it!


Dear Jakk,

Please accept our unreserved apology. Please send us your receipts and we'll gladly refund the difference.

Yours faithfully,

Customer Relationships Manager
Hiya Jakk!

Bear with me please . . . this is not an easy one, obviously.

In a nutshell, the demolition of the old home means nothing because a) you received no money; and b) the PPOR is not a taxable asset.

Bye the way, GST also applies and so I will assume that your information excludes GST and you should be able to use the margin scheme to reduce the pain involved there.

The sale prices of $1.02m will show deductions of $450k (and the demolition costs) and the $300k for the value of the land.

Therefore, profit at face value will be $270,000 and you will be taxed accordingly.

Now, the sting is that you also face CGT on the same transaction. Yes, there is the potential to be taxed twice!

Cost of house $146k plus demolition costs, plus construction costs plus sale costs. Say $596k.
Sales price $1.02m

Therefore, preiliminary gain = $424k
less taxable amount as shown above of $270k

Capital Gain therefore = $154k
less 1/2 exemption because asset held for more than 12 months means that a taxable CGT of $77k will also be shown in your tax return.

So, taxable income = $270k
and Capital Gain = $77k

I hope that this helps

G'Day Dale,

and thanks for your reply

you wrote....

...."In a nutshell, the demolition of the old home means nothing because a) you received no money; and b) the PPOR is not a taxable asset."....

then you further wrote.........

....."Capital Gain therefore = $154k
less 1/2 exemption because asset held for more than 12 months means that a taxable CGT of $77k will also be shown in your tax return.:.....

What I am having trouble understanding here is that even though the PPOR is Capital Gains tax exempt, you say I might be liable for tax on the gain from $146,000 to the current value of $300,000. So really, it is not exempt in this case.

Which idiot in the Tax Office came up with this?

Thanks again Dale

Hi Jakk!

I'm sorry that I confused you . . . whilst I was not clear in what i tried to say, what i meant was that the destruction of the original house does not trigger any tax liability or loss because it is the PPOR.

Normally, if you destroy or eliminate an asset, you have triggered a CGT event but in this instance, the houseis your PPOR and so we ignore that event.

Have I helped or am I just confusing things further?

Bye the way, welcome to our nightmare. The tax law is full of this rubbish and I can assure you that it helps to appreciate Scotland's finest drops!!

Have fun

Hi Jakk,

Sometimes we put put up the white flag to the ATO too soon by asking as you did "...what $amount is to be taxed". Alternatively, if you are willing to explore alternatives a better question may be, "how can I realise this development and minimise my tax?". Obviously, not all alternatives will be commercially realistic for your personal circumstances, nevertheless you'll better understand your choices.

An example of one alternative (and their are many) that comes to mind in the circumstances you describe is as follows:

1. Transfer PPOR to family trust for mkt value ($300k)

You claim PPOR exemption and pay no CGT on $154k gain. Try and engage a "sympathetic valuer" to nudge up that market value.

However, trust will pay stamp duty on transfer.

2. Family trust develops townhouses

3. Family trust sells completed townhouses to open market

Based on the figures provide trust realises a profit of $270k. and ultimately distributes to trust beneficiaries.

4. Family trust distributes profit to beneficiaries (Option a or b)

a. Profit is ordinary income (not capital gains)

In the situation you describe where completion is followed by immediate sale to open market, the profit will arise out of a "profit making undertaking or scheme" and be taxed as ordinary income in the beneficaries hands (ie no 50% CGT discount).

To avoid individual beneficiaries being taxed at high marginal rates you may wish to consider corporate beneficiary (30% tax rate) to effectively "park" profits which would otherwise be taxed at marginal rates in excess of 30% if distributed to individual beneficiaries.
The profits parked in the corporate beneficiary can ultimately be "drip fed" back into the trust and out to individual beneficiaries by way of franked dividends paid to trust as a shareholder, in future years when individuals may be subject to lower marginal tax rates.

b. Profit is capital gain (subject to 50% discount)

To reduce the likelihood of the profit on sale of the townhouses arising out of a "profit making undertaking or scheme" and therefore being taxed in full, you may wish to adopt a "quasi develop and hold" strategy which may allow you to argue that only the CGT provisions will appy to any ultimate sale where you "drip feed" the townhouses onto the market. The question of course is how long would you need to hold these townhouses before selling and what other circumstances can be relied upon to rebut any argument of a profit making undertaking. Welcome to the grey area of tax law - good advice, the factual circumstances and your own risk profile will ultimately give you an indication of where this line should be drawn.

Where the 50% CGT discount applies that could mean a total taxable profit of $135k (50% of $270k) versus the taxable profit you had surrended to initially of $347k?. That equates to a saving of over $100k in tax at 48.5% rate.

I have skimmed over the finer details but at least you may get a sense of some of the options available. Hope this helps.
G"day to both you Gentlemen, Dale & Richard,

I thank you both for the genorosity of your time to analyse this scenario that I put forward.

The scenario is not fictional but an actual project for which I have received permits and was considering undertaking.

I am not totally oblivious to the tax implications of this project but I thought, (was hoping), that there might be an answer that I was unaware of, that enabled me to pay a lot les tax.

That not being easily the case, I have decided that now is not the time to develop as I would not be in a position to comfortably hold on to these townhouses and still proceed with other projects.

So Gentlemen, you both have now inspired me to move on with other plans until I am in that comfortable position of developing this property and not having to sell.

This now poses another problem, once I do develop this property, the townhouses will be one hell of a lot more upmarket with respect to my current portfolio.

The problem therein is that I may have to drop the Slum Lord designation that I now so proudly behold.

This problem has now reared up and seems to be bothering me more than any tax implications previously discussed.

Ah well, I'll just have to go to the fridge and see if there is an answer in one of those stubboirs.

Have a great day to both of you and many, many thanks for your respective advice. When next in town, the stubboirs are on me.

Hi Jakk,

A solution to your new, non tax related issue...:p

1) Don't tell anyone you are doing the dev or own the new townhouses

2) Do absolutely no maintainance on the TH's

3) Wait many years and allow natures hand to turn your once lovely new townhouses into the slums that you favour

4) Ring everyone and tell them about the great new slummy block that you've bought!!!

Mental note; Jakk (should that be Jack?..hehe) is a member of the spelling

1) What does this word "GENOROSITY" mean and why are you thanking people for it?

2) What does this word "LES" mean or should I presume that you are trying to pay a guy named Les tax for some reason?

3) Can you see how tedious replying with a post about incorrect spelling could get if everyone decided not to use common sense and just figure out what the person is talking about?...:p


PS: In case it was a serious question : MAINTENANCE!!!!
Hi Chris

I think you will find that Jakk was being silly and suggestiing that he does not maintain his existing property portfolio and hence his moniker of the slum lord.

Have fun


I hadd no ideer that u spelt that wurd rong, I was seriarsely arsking what that wurd ment.

Hi Jakk, Dale,

WHOOPS!! Spotted the capitalised/quoted spelling mistake and presumed that what was meant. Silly me!

Looks like you dont need my idea afterall Jakk. Just keep ignoring that word and those TH's will be slums b4 you can say "Next property cycle".... ;)