For tax purposes, home is where the subdivision is

Max Newnham


October 10, 2017

The increasing value of homes and the willingness of many metropolitan councils to allow greater building density has presented some homeowners with the chance to maximise the value of their homes and minimise their tax payable. Now, there’s an opportunity on the horizon that could provide even more incentive for clients who are 65 and older to sell their homes.

The 2017 budget proposed legislation related to downsizing a home. Clients who might be interested in the initiative would include people with relatively little in superannuation pension accounts, who no longer meet the work test but would like to improve their lifestyle in retirement by having more in superannuation.

Under the proposal, a person could make a non-concessional contribution to a superannuation fund of up to $300,000 when selling their home to downsize, if the home has been owned for more than 10 years. If a couple owns the home, they could contribute $300,000 each.

Just how valuable this proposal will be in helping clients maximise the value of their superannuation will depend on the fine detail in the legislation. It will be interesting to see what definition is determined for downsizing, and whether it would include subdividing a standard quarter-acre block, building a new residence, and then selling the old home.

Not taking into account this new super proposal, the financial benefit of maximising the value of a principal residence for sale via subdivision cannot be denied. Unfortunately, if a sale is made the wrong way, capital gains tax (CGT) could be payable.

One of the safest options for clients who want to maximise the value of their property, without risking making some of the profit taxable or undertaking a building project, is to first subdivide the property then sell it, with plans and permits for the construction of a new dwelling.

If the client wants to undertake the financial risk of going one step further and building a new house on the subdivided property, with a view to maximising the overall value, care must be taken or capital gains tax and GST could be payable.

This would occur if the client sells the new structure, rather than selling the original home and moving into the new building, because this would be considered a profit-making enterprise. As the sale value would exceed the GST registration level of $75,000, one-11th of the proceeds could potentially be paid to the Australian Taxation Office in GST.

Advisers with clients in this situation should inform them of the margin scheme for calculating GST on the sale of the property. Where something has been purchased that did not include GST in its price – such as an existing home and not a new home purchased from a developer – the vendors are eligible to use the margin scheme.

Under this scheme, one-11th of GST is payable on the difference between the non-GST original cost and the sale value of the property. The downside of this option is that CGT would be payable on all of the gain made if the property were sold within 12 months of construction.

Under current law, if the aim is maximising the after-tax return on selling a home and removing all chances of paying GST, clients should be advised to construct the new dwelling on the subdivided part of the property, sell the existing home, and then move into the dwelling, which becomes their new principal place of residence.

TOPICS:   capital gains tax,  downsizing,  GST,  retirement,  subdividing,  TAX

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