Friday, 7 September 2012

Working out your CGT and GST obligations

Working out your CGT and GST obligations


Max Newnham SMH

A person’s home will in most cases always receive the capital gains tax residence exemption for as long as its use does not change. The exception to this rule is when the land a home stands on is subdivided. When this occurs CGT can be payable depending on the facts of each case.

Q. I am looking to knock down my existing home, build a duplex and then sell one to finance the construction costs for both. I intend to live in one of them. The property is located four kilometres from Melbourne's CBD. What taxes will I have to pay and at what rate? Will I pay tax on both properties? Is there a correct procedure to minimise my tax costs?

As you intend to undertake this as a profit-making venture you will also need to register for GST.  A. To achieve what you are planning to do you will, once the duplex is finished, have to subdivide the property so that each half of the duplex is on its own land.

As a result you will end up with two separate assets, one being the half of the duplex you intend living in that will be CGT exempt, and the other duplex you plan on selling.

When you sell the duplex to repay the construction costs, CGT will be payable on any profit you make. As you intend to undertake this as a profit-making venture you will also need to register for GST.

This is because new homes are subject to GST, while homes that are five years or older are not.
As a result, in addition to paying CGT, a portion of the selling value of that duplex would also have GST paid on it  To offset the GST payable on the selling value you will also be able to claim the GST on the construction costs related to the duplex you are selling.

As you would not have paid GST on original property you could use the margin scheme to calculate the GST included in the sale price. Under this method GST is paid on the difference between the original non-GST inclusive cost of the property and its selling price.

To work out the original cost of the property all of the original purchase costs and other things, such as stamp duty and legal fees, are taken into account.
In addition any costs while you have owned the property such as rates, repairs, interest on the mortgage, and renovations, will be added to arrive at the final non-GST cost of the property.

This non-GST cost must then be split between the two duplexes.
To this cost will be added the construction cost of each duplex to arrive at a total cost for each of them.

The amount that your net sale proceeds, after deducting the GST payable and other selling costs such as agents fees, exceeds the costs of that duplex will be your profit.

The profit on this duplex will need to be apportioned between the block of land and the new structure. This is because the 50 per cent capital gains tax discount will apply to the land portion of the profit, while capital gains tax will be payable on all of the profit made on the building structure.

This is because it will not have been owned for more than 12 months.

Tax will be payable on the assessable capital gain at your relevant marginal rate of tax. Instead of selling the second duplex immediately, you could rent it for five years and avoid having to register for GST. In addition when selling that duplex you would also receive the 50 per cent general CGT discount.
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