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CGT for sell or transfer of land with half-built house mid-construction

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We have bought a subdividable block of land in Shelley and is currently under subdivision process. The intention is for me to build a single storey at the front and my parents will build a double storey at the back. The land was purchased under my name and once they obtained their permanent residency (anticipated end of 2020), I will transfer the rear lot to them. We have a couple of options with some questions that would like some help to clarify:

 

Option 1: we can build the front house now, once title obtained for the rear lot, transfer the vacant land to them and then they start building. So, we just need to pay stamp duty and CGT on the land, and not sure if I will need to pay GST on this occasion?

 

Obviously, the downside of option 1 is that they have to wait for a year+ before they can start building two storey and construction will happen after we moved into the front house, and will have to tolerate all the construction activities happen to the rear lot.

 

Option 2: we can apply for DA and build both houses at the same time, and by the time their visa is granted, the rear lot should have title ready and construction might be at slab or frame stage, my question here is whether we could transfer or sell the land with an unfinished construction to my parent and transfer the building contract to them to complete. If so, how CGT and stamp duty would be calculated in this situation? Will this be a transfer/sale of vacant land or newly established property? Can I just base my sales/transfer price off a written appraisal from a licenced real estate agent?  Or Will I need to get a licenced evaluator to create a stamp duty purposed evaluation report for both front and rear lot? Will the evaluator be able to evaluate a land with a half-built construction in which there will be no other market data to compare?

 

If we must transfer the rear lot with the finished house, that will attract higher CGT and stamp duty and out benefit the time saved. Also, we try to avoid FIRB as this is calculated to cost at least 40k more in stamp duty and costs.

 

One more question, would I be able to claim the rear lot as my primary residential without a house so it can start counting the time from when I purchase, or will it have to be started counting only after construction completed?

 

Any advises or recommendations regarding my questions and options above would be highly appreciated.

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Hi @ylbillyli,

 

Yes, under Option 1, you will need to calculate CGT on transfer on the subdivided undeveloped land. Ordinarily, unless there is some particular circumstance  leading to increasing value of the land, for example a substantial increase in suburb values or developers seeking to buy adjacent  land etc. then there may not necessarily be any material increase in value of the undeveloped back  block over your costs, but you would nevertheless need to consider this aspect. Where you sell undeveloped subdivided property then the cost base, such as purchase price of the whole property needs to be divided  up in a reasonable  way, such as apportionment of cost on an area basis-where appropriate.

 

With Option 2, the sale of the back block will need to take into account the market value of the property at that time. Once again, it needs to be considered whether the addition of construction costs to other costs  results in a total cost amount for you that is substantially less than the likely market value of the property. If a price is struck that reflects market value then CGT can be  appropriately ascertained.

 

Generally, an appraisal from a real estate agent can produce a valuation that can be considered reasonable in this context.

 

Finally, in order to obtain a main residence  exemption, it can only apply to a dwelling being sold, and it can only apply to a vendor where they have lived in  it as a main residence.  In this context the back dwelling is treated as a different dwelling to the front dwelling, where you have only lived in the front dwelling.  If you have been using both buildings  as your home at the same time then this could be a situation where the main residence exemption could apply on sale of one of the buildings.  See the following link for when two buildings can be part  of a ‘dwelling’  or not for main residence purposes: Multiple buildings and main residence.

 

 

Thanks

 

KylieS

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Hi @ylbillyli,

 

We have referred your question off to a technical area to get a response for you. We'll get back to you shortly!

 

Thanks, NateH

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Hi @ylbillyli,

 

Yes, under Option 1, you will need to calculate CGT on transfer on the subdivided undeveloped land. Ordinarily, unless there is some particular circumstance  leading to increasing value of the land, for example a substantial increase in suburb values or developers seeking to buy adjacent  land etc. then there may not necessarily be any material increase in value of the undeveloped back  block over your costs, but you would nevertheless need to consider this aspect. Where you sell undeveloped subdivided property then the cost base, such as purchase price of the whole property needs to be divided  up in a reasonable  way, such as apportionment of cost on an area basis-where appropriate.

 

With Option 2, the sale of the back block will need to take into account the market value of the property at that time. Once again, it needs to be considered whether the addition of construction costs to other costs  results in a total cost amount for you that is substantially less than the likely market value of the property. If a price is struck that reflects market value then CGT can be  appropriately ascertained.

 

Generally, an appraisal from a real estate agent can produce a valuation that can be considered reasonable in this context.

 

Finally, in order to obtain a main residence  exemption, it can only apply to a dwelling being sold, and it can only apply to a vendor where they have lived in  it as a main residence.  In this context the back dwelling is treated as a different dwelling to the front dwelling, where you have only lived in the front dwelling.  If you have been using both buildings  as your home at the same time then this could be a situation where the main residence exemption could apply on sale of one of the buildings.  See the following link for when two buildings can be part  of a ‘dwelling’  or not for main residence purposes: Multiple buildings and main residence.

 

 

Thanks

 

KylieS

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Great thanks @KylieS 

 

I would like to find out if I have the option to claim ONLY the rear house as primary residential even before the house finish construction, such that I can transfer it to my parents under CGT excemption and then I could move into the front house afterwards?

 

Put it in other words, can I claim a residential land (with no dewling) to be my main residence?

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Hi @ylbillyli,

 

Great question! Your main residence must have a dwelling on it and you must have lived in it in order to claim the CGT exemption. You're not entitled to the main residence exemption for a vacant block.

 

Thanks, NateH

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Thank you @NateH 

 

Lastly, will I need to pay GST when I transfer the rear lot by option 1 or 2?

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Hi @ylbillyli

 

Thanks for your reply.

 

We have some great information about subdividing land and GST on our website.

 

If you subdivide a block of land – such as the land on which you live – and sell the newly created block, any profit is generally treated as a capital gain subject to capital gains tax (CGT).

 

However, any profit is treated as ordinary income (not a capital gain) if both of the following apply:

  • your intention or purpose in entering into the transaction was to make a profit or gain
  • you entered into the transaction, and the profit was made, in the course of carrying on a business or carrying out a business operation or commercial transaction.

 

If both points apply, you'll probably have GST obligations and entitlements.

 

You have advised in a previous post that your intention when buying the land was to subdivide it for the purposes of building houses for you and your parents, not for the purposes of making a profit. In turn, it doesn't sound like GST would apply to either scenario.

 

Of course, we can only provide information in accordance with what you have said and we don't know all of the details. If you're unsure whether your subdivision transaction is a profit-making activity, a business, a commercial transaction or something else, write to us and request a private ruling to determine your tax position.

 

For more information about applying for a private ruling, refer to our website.

 

Also, while this isn't about GST, we have another page on our website that you might find helpful. Have a look at the transferring real estate to family or friends page for some potentially useful information.

 

Hope this helps.

 

Thanks,

 

ChrisR

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