Knocking down and rebuilding? Don’t fall for these tax traps
Obviously, you want this change of purpose to be at market value. This means you must declare capital gains in the income year in which you change purpose. Unfortunately, before you get the cash to pay CGT, you’ll lose any benefit from the 50 per cent CGT discount on any capital gains you’ve made since buying the property.
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Given the tax implications and risks associated with construction, you may consider simply subdividing the block and selling the vacant land to finance your new home. Unless you purchased the property with the primary intention of subdividing and cutting off some of the land, this move can only be considered the realization of an asset.
Don’t be too business-like; Just do the minimum work required by the council and get an estate agent to organize the sale. Mere realization of an asset means that the gain remains within the 50 per cent CGT discount concession.
Regarding GST, don’t let anyone convince you to register for GST. You only need to register for GST if your turnover exceeds $75,000. The sale of a capital asset is not considered a turnover. But if you have registered for GST it is too late. Once you are registered for GST, the sale of vacant land will be subject to GST, even if it is a capital asset.
There is a way to sell the other side of the duplex without charging GST. This means keeping the property as a permanent rental for at least five years. If you can show that you actually built the other side to hold it as investment property, this will also keep the capital gains within the 50 per cent CGT relief concession.
Julia Hartman was founded BAN TACS Accountants Over 30 years ago and I am still passionate about all things tax.
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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