TAX TIP #11: CAPITAL GAINS TAX | PROPERTY DEVELOPMENT | CHANGE OF INTENTION

Facts

Individual I owns, and has occupied, a main residence of 1,000m2 for the last five (5) years.

Individual I wishes to sub-divide into two (2) x lots of 500m2, build a house on each lot and sell both lots.

Question

Are the entire profits subject to CGT?

Answer

No. The profits are part subject to CGT (capital account) and part subject to ordinary income (revenue account).

Tax Tip

1. The value of the property up to the time of changing intention, that is the time when costs were first incurred to commence subdivision, is subject to CGT whilst the value of the property from the time of changing intention to the time of the sale is subject to ordinary income.

2. It is important to obtain a valuation of the property at the time of changing intention to substantiate the calculation.

3. The property is no doubt a CGT asset and there is CGT event A1 for the sale of each lot.

4. However, section 118-20 (anti-over lap provision) provides that a capital gain is reduced if another provision of the Tax Act applies.

5. In this case, section 6-5 (ordinary income) applies to the capital gain made from the time of changing intention to the time of the sale.

6. For example:

   1. the property was acquired for $100,000 (A);

   2. building costs will be $500,000 (B);

   3. the market value of the property, when costs were first incurred to commence subdivision, was $250,000 (C); and

   4. the sale price is $1M (D) (for both lots).

7. The ordinary income is $250,000 (E), being $1M (D) less $500,000 (B) less $250,000 (C).

8. The capital gain is $nil, being $1M (D) less $500,000 (B) less $250,000 (C) less $250,000 (E).

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