Obviously, you want this change of purpose to be at market value. This means you need to declare a capital gain in the year of income that you change the purpose. Unfortunately, before you get any cash to pay the CGT, if you lose any advantage of the 50 per cent CGT discount on any of the capital gain since you purchased the property.
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Considering the tax consequences and risk associated with building, you might want to consider just subdividing the block and selling off vacant land to finance your new home. As long as you did not buy the property with the primary intention of subdividing and cutting off some of the land, this move can be considered merely realising an asset.
Don’t get too business-like – just do the minimum works that the council requires and get a real estate agent to organise the sale. Merely realising an asset means the gain stays within the 50 per cent CGT discount concession.
Regarding GST, do not let anyone talk you into registering for GST. You are only required to be registered for GST if your turnover exceeds $75,000. The sale of a capital asset does not count as turnover. But if you are registered for GST, too late. Once you are registered for GST, the sale of vacant land, even though a capital asset, will be subject to GST.
There is a way to build the other side of the duplex and sell without charging GST. That is to keep the property as a rental for a continuous period of at least five years. If you can show you genuinely built the other side to hold as an investment property, it will also keep the capital gain within the 50 per cent CGT discount concession.
Julia Hartman founded BAN TACS Accountants more than 30 years ago and is still passionate about all things tax.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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