CGT on Renovations??

I do not want you to follow this information without a second opinion from the ATO, so I have included the relevant web sites that confirm my knowledge on tax law in this area.

-Would we have to pay CGT on the profit (I assume yes).
Yes and may be no.
Is it a primary place of residence – Are you living in it while doing the renovations and what was the purpose of buying the property, where you buying it for the purpose of making a profit see later web links for more information on purpose?

If Yes to you purchased it for the purpose of being your main residence you may get CGT tax exemption after a certain time period of living in the house.

Is it going to be owned for 12 months – 50% cgt tax discount could apply. see http://www.ato.gov.au/businesses/content.asp?doc=/content/18427.htm

If owned 50/50 CGT will be 50/50. This means that 50% of the taxable capital gain is added to each joint owners other tax assessable income to work out what tax bracket rate each of you will be paying for the capital gain. You need to look at the tax rate scales to work this out.see http://www.ato.gov.au/individuals/content.asp?doc=/content/12333.htm

Can we claim all the costs for reno's (40K) as a tax deduction?
As you spent 40k on renovations you add this to the cost base for a Capital Gain reduction – must have receipts your labour is not billable or claimable. see http://www.ato.gov.au/individuals/content.asp?doc=/content/36919.htm

Another issue is whether there will be GST on the renovations if you sell. If you do substantial renovations GST is involved . The question is knowing what a substantial renovation is? Could involve being registered for GST.
see http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR20033/NAT/ATO/00001 section 54 to section 140

OR

If we keep the house after the 40k of renos and rent it out could we still claim all the reno's (40k) as a tax deduction.

You would be able to claim depreciation on the fittings and fixtures if rented or add it to the cost base but you can not claim both ways as this is referred to as double dipping and the ATO doesn't allow two different forms of deductions on the same item.

Working out a depreciation schedule for effective life of items can be difficult so I am suggesting you use a quantity surveyor if you go down this direction.

We are not sure what the best way to go??
You need to know what investment method you are planning on using.

(1) You are a trader and you renovate for quick profit and then do it again
      (if done too often you can be classified as a trader and not get CGT exemption as PPOR. see http://www.ato.gov.au/corporate/content.asp?doc=/content/57402.htm&page=2&H2 )

(2) You are a buy, hold and never sell type of investor and have a long term plan.

suggest you look at the following
http://www.ato.gov.au/corporate/content.asp?doc=/content/57402.htm&pc=001/001/038/002/002&mnu=&mfp=&st=&cy=1
http://www.ato.gov.au/corporate/content.asp?doc=/content/00208572.htm&pc=001/001/038/001
http://www.ato.gov.au/individuals/content.asp?doc=/content/00191831.htm&pc=001/001/038/002/014
http://www.ato.gov.au/corporate/pathway.asp?pc=001/001/038

Succinct and thorough advice Duckster, you've answered a question I too required clarification on.

Cheers,
James