Hi,
We're in the process of demolishing our PPOR, subdividing and building two houses on the vacant block of land. One property will be used as a new PPOR, the other for investment purposes. We're yet to fully understand the CGT rules applicable to the newly-created IP, so I need all the help and info I can get!
I rang the ATO this week and was told that once the land is subdivided in two, the second portion of the land, which will be used for the construction of the IP, will be subject to CGT from the time the main PPOR was purchased. Considering this was 7 years ago, am I to think the CGT we'll be liable for will be "backdated" 7 years (???)? This seems highly unfair, or maybe I've misunderstood the concept?
Apparently, there is also no main residence exemption once the PPOR is demolished, yet one of those two properties will eventually become a PPOR and no CGT event would have occurred for that property specifically. Does the ATO normally contradict itself?
I was also informed to be careful as to which order I do things in – if I demolish first, then subdivide, or if I subdivide, then demolish. Could anyone please shed some more light as to why this order of things makes such a difference come tax time?
Private ruling could also be the way to go before everything is finalised during 2011, but I'd appreciate some more information from someone more knowledgeable before I even consider writing to the ATO.
Thank you!
You can only have one main residence at any one time. When you sub-divide you will have two properties, so from the date of sub division only one can be your main residence. Vacant land can't be a residence. I think the new land once sub divided will have a cost base of the value at the date of sub-division – but i may be wrong.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Yes, I will eventually be provided with a cost base of the land (backdated to when the PPOR was purchased), but the thing from the ATO that threw me off was that the second portion of the subdivided land (the one where the IP will be built) will be subject to CGT from the time the PPOR was purchased. If there was no IP or second property on the block of land 7 years ago, how can they honestly give me the CGT bill for a property that did not exist then? Or am I missing something here?
I don't think that is correct, the cost base of the new land should be the value at the date of creation. Assuming you have a house on it now, it should all be CGT exempt (as long as its your main residence etc).
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I was told the cost base of it all would be valued from the time the PPOR was purchased. This means they'll backdate the valuation to the purchase date, halve it, and find out how much half of the land is worth (the one where the IP will be built). Only the portion of the land used for the construction of the PPOR will be CGT exempt. Might have to go for a Private ruling, after all.
Thanks, Terryw.
Ring the ATO again, twice more and you may get different answers. Also look at the PDF files at http://www.bantacs.com.au – i thnk htere is one called 'how not to be a property developer'
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
hi shangrila
the appropriate portion of the original purchase price will determine the cost base, not the value at the time of subdivision. (sorry terry)
http://www.ato.gov.au/individuals/content.asp?doc=/content/00191831.htm&page=70&H70
second example (#58) half way down.The reason is that for the exemption to apply to an asset (for any period of its life) then the cgt event in question must also happen to the dwelling upon which the exemption relies (s 118-165) To put it another way, when the subdivided block is eventually sold, that particular cgt event will not also happen to your PPOR. see also (Taxation Determination TD 1999/73).
re: tax office contradictions.. yes, it does happen all the time, thats just the charm of australian tax law! There’s other rules which apply to his situation which act in your favour. The reason why you still get it for the whole period on -one- of the properties is that your demolishing, constructing, and moving in, as soon as is practically possible, or in other words, your primary reason for doing it is to provide yourself a home.
re: private ruling, probably not a good idea… its pretty time-consuming to prepare an application for one, so it will cost you a bunch in accounting fees. and I can guarantee the commissioner would not rule in your favour.
Sorry to be the bearer of bad news… but I hope this clears up the confusion
Thanks Mr. Its best to know the correct answer, even though it hurts.
Doesn't seen fair though!Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Mr5o1!
I thought things wouldn't be all that great, but I think my main saving grace here is that the IP will be held for >12 months, so at least the 50% CGT exemption rule will apply.
I'm still confused as to why it matters which order I do things in – subdivide and demolish, or demolish and subdivide. Any ideas?
sorry shangrila.. I’m not really sure on that one, can you be a bit more specific? was it the tax office that told you that?
The ATO rep I spoke to told me to be careful which order I do things in. I'm not sure why, as he didn't elaborate further, but I was left with the impression that that will have an impact on how my tax is determined – whether it's a property development business "event" I'm doing, or just with the intention to build and rent it out.
I’ve spent a little time thinking about this, and I have to admit, I’m unsure why the order in which you subdivide and demolish would be pertinent to whether or not you are in business.
What if the existing building sat astride the new boundary line between the two new blocks? then you would have no choice but to demolish before you subdivided.
The criteria generally considered in determining whether an activity is a business are:
-significant commercial activity
-a purpose of acting in a commercial way
-an intention to make a profit
-a reasonable prospect of profitability
-repetition or regularity of activity
-reasonable size and scale
-conformity with normal business practice
-existence of a business plan
-keeping of detailed business records
-commercial sales of product
-exercise of knowledge or skill (Taxation Ruling TR 97/11).I would argue that the simple fact that you have owned this property for > 7 years suggests that you didnt purchase it with the primary purpose of developing the property through subdivision. Sure, that may have been a secondary purpose, but it would appear your primary purpose was to provide yourself a home.
That said, just because I dont understand the problem, does not mean that no problem exists. I would ring the ATO again, and ask them specifically about the order in which you subdivide and demolish. If you can ask them to provide a reference something on their website, or even a Taxation Ruling/Determination, and post it here, I would really appreciate it. We’re all here to learn after all.
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