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Edited version of your written advice
Authorisation Number: 1012931525143
Date of advice: 23 December 2015
Ruling
Subject: Capital gains tax and GST on subdivision of land
Question 1
Am I liable to pay Goods and Services Tax (GST) if I sell a newly constructed residence (the first dwelling) on a green title block of land that is a subdivision of a property I have owned and lived in continuously as my main residence for 20+ years and will live in as my main residence for at least 9 months prior to the sale?
Answer
No, you are not liable to pay GST on the sale of the first dwelling.
Question 2
Am I liable to pay Capital Gains Tax (CGT) if I sell a newly-constructed house (the first dwelling) on a green title block of land that is a subdivision of property I have owned and lived in continuously as my main residence for 20+ years and will live in as my main residence for at least 9 months prior to the sale?
Answer
No, you are not liable to pay CGT on the first dwelling, provided you choose it to be your main residence.
This ruling applies for the following periods:
The year ending 30 June 2016.
The scheme commences on:
1 July 2015
Relevant facts and circumstances
• You purchased a house in 19XX as your main residence.
• In 20XX you applied to subdivide the land into 2 lots.
• You obtained permission to build a house on the first lot and submitted plans to the local council shortly after.
• In early 20YY you vacated your house and moved in rental accommodation.
• Your house was demolished and construction commenced in early to mid 20XX.
• It is anticipated that the new house will be completed and ready to be occupied in 20ZZ upon which time you and your spouse will move in and take up residence.
• Your intention is to obtain approvals to build on the second lot which including construction is expected to take 12 months to complete.
• Once the second dwelling is completed, you plan to sell the first dwelling and upon sale take up residence in the second dwelling, making it your residence for the foreseeable future.
• You anticipate that you would have lived in the first dwelling for approximately 12 months.
Relevant legislative provisions
Income Tax Assessments Act 1997 118-110.
Income Tax Assessments Act 1997 118-145.
Income Tax Assessments Act 1997 118-140.
A New Tax System (Goods and Services Tax) Act 1999 9-5.
A New Tax System (Goods and Services Tax) Act 1999 9-20.
Reasons for decision
Question 1
Summary
Your activities are not considered to constitute an enterprise and are not subject to GST. Therefore you are not required to pay GST on the sale of the first dwelling.
Detailed reasoning
The sale of house and land is a taxable supply and therefore subject to GST (section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)) where:
(a) You sell the house for consideration (ie money);
(b) The sale of the house and land is made in the course or furtherance of an enterprise you carry on;
(c) The supply of real property is connected with the indirect tax zone (ie it is in Australia); and
(d) You are registered or required to be registered for GST.
And the supply is not a taxable supply to the extent it is GST free or input taxed.
It is considered that paragraphs (a) and (c) will be satisfied. In relation to paragraph (b), where the sale of the house is not in the course or furtherance of an enterprise you carry on the sale of the dwelling will not be subject to GST.
"course or furtherance of an enterprise you carry on"
The course or furtherance of an enterprise does not need to consist of the carrying on of a business but may also be in the form of an adventure or concern in the nature of trade.
Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) at paragraph 233 provides that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.
Paragraph 266 of MT 2006/1 states:
In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined …, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.
The factors relevant to your circumstances include:
• Was there a change in purpose for which the land was held?
• Was there a level of development which goes beyond that necessary to secure council approval for a subdivision?
• Were buildings erected on the land?
In your circumstances it is considered that weighing up the relevant factors your activities are not in the form of an adventure or concern in the nature of trade or related to the carrying on of a business for the following reasons:
• You have lived at your residence for over 20 years and intend to remain at the residence for the foreseeable future (albeit in the second dwelling) on the same original block of land;
• Whilst you went beyond the mere sale of a subdivided lot and constructed a house on the land, you will reside in it (as you main residence) for a period of approximately 12 months.
From the above facts it is clear that your activities do not have a commercial character and that your activities constitute a mere realisation of part of your original residence (ie the sale of one subdivided lot out of the two created). Therefore the sale of the first dwelling will not be subject to GST under section 9-5 of the GST Act.
Question 2
Summary
You are not liable to pay Capital Gains Tax (CGT) on the "first dwelling" of the subdivision as this house is your main residence and will be exempt from CGT pursuant to section 118-110 of the ITAA 1997.
Detailed reasoning
You include in your assessable income all income from ordinary concepts (known as ordinary income). This income includes, amongst other things, salary and wages and business income. It is considered that your subdivision activities are not business income and therefore not assessable as ordinary income.
The sale of a capital asset may be subject to capital gains tax. This may include the sale of a house and land. However section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you may disregard a capital gain or loss in relation to a dwelling if you are an individual and the dwelling was you main residence throughout your ownership period.
You may choose to continue to treat a dwelling as your main residence where you no longer use the dwelling as your primary residence indefinitely (subsection 118-145(3)), provided you do not rent it out (subsection 118-145(2) - special rules apply)) or you do not treat any other dwelling as you main residence except in circumstances where you are changing main residences (subsection 118-145(4) and subsection 118-140(1)).
In your circumstances it is considered that you may treat the first dwelling as your primary residence whilst it is being constructed provided you do not claim any other dwelling as your main residence.
Further Information
If you choose to treat the first dwelling as your main residence you may do so up until the time the property is sold or upon which time you choose to treat the second dwelling as your main residence. If you choose to treat the second dwelling as your main residence whilst you still have an ownership interest in the first dwelling, both dwellings may be treated as you main residence for the shorter of 6 months or until you sell the first dwelling.
As you are only permitted to treat one dwelling as your main residence at a time, you will not be eligible to claim the main residence exemption on the second dwelling from the time when the lot was created (dd/mm/yyyy) until such time the dwelling becomes your new main residence. Therefore you will be required to pay capital gains tax on the second dwelling for the period of time (as a proportion of the total period of ownership) that the dwelling was not your main residence.
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