Renovating for profit – Reducing Tax HELP PLEASE

Well.. theres a lot to consider.

Firstly, you only have to live in the property for 3 months, (12 months relates to the 50% Discount). I couldnt find any concise info about this to refer you to.. because I dont think there’s a specific “rule” about the minimum amount of time. Your really depending on precedent cases such as Erdelyi (2007 ATC 2214) where 3 months wasnt enough for an exemption and Summers (2008 ATC) where 4 months was enough for the exemption. The official legal speak lists a number of criteria need to be considered in determining whether your eligible for the exemption. Like:
-the length of time you live there
-does your family live there
-have you moved in personal belongings
-the address your mail is delivered to
-your address on the electoral role
-connection of phone services etcetera
-your intention in living there

I guess I’m trying to say (in a round-a-bout way) that its not ONLY about the length of time you live there… and you need to make sure that you tick the other boxes… if you sell after 3 months and 1 day, you really will be relying on the other criteria if the tax office investigates it.

Also, if its your PPOR, then you will not have to pay GST on the sale price provided that you did not construct the original building, and that you did not renovate it extensively enough for it to be considered “practically a new construction”.

I realise you were really asking about company or trust structures.. but I just thought I’d clear up the 12 month thing

Hopefully this helps?

EDIT:
Oh, actually this:
http://www.ato.gov.au/individuals/content.asp?doc=/content/36883.htm
says there is “no minimum amount of time” – but the amount of time WILL be considered along with the other points listed above (like in the erdelyi case).

thats right & your welcome

will see if I can find links to more info about those cases tomorrow!

Hi Mav,

You may have already considered this, but I'll throw it out there just in case. I know in QLD (I'm sure it's the same in SA, but do not know about other states), that even if the property is your PPOR, you will still have to pay Stamp Duty at a pro-rata full rate.

To explain futher. When you buy as an investment, you pay full SD. When you buy as a PPOR, you receive a discount on the SD. In our instances when we do just what you're planning to do, when we sell within 12 months, then we've not fully met one of the conditions of receiving the discount – the condition that states we have to live in the property for a set period within the first 12 months. Therefore we pay the pro-rata on the difference between the full rate and the discount rate. E.g. if we received $5,000 discount for a PPOR (paid $3,000 instead of $8,000), and sell the PPOR after 6 months of living there, then we have to pay $5,000/12 months of the year, multiplied by the 6 months we didn't stay there – $2,500.

The Office of State Revenue website in your state will explain more clearly (or ring like we do often).

There is no set time to live in a place to qualify as a PPOR, but like MR501 states, it's more than just duration that determines this.

The determination as to whether you're running a business or not is not so clear cut. We've spoken to Tax Accountants, specialists in property, even the ATO. If you do one or two renovations a year, then that's generally not considered a business. After 3 a year, then it may be considered a business. But the amount of profit you generate also comes into this as well. If it's over $75,000 (regardless of properties), then this may be considered a business. There are a number of factors that come into play. Anybody able to clarify this for us as well, would be greatly appreciated.

Another consideration you may want to look at is what's considered a renovation – this varies from state to state. In some states, any renovations over $12,000 may require you to hire a builder or become an owner builder to manage it. Again, this is not completly clear cut, as it is not clear in what time frames the renovation is considered. E.g. if you do $10,000 in one month, then 3 months later do another $10,000, is this one $20,000 reno, or two $10,000 renos? As above, if anybody has definative answers to this as well, it would be appreciated.

Hope this provides some useful information.

Cheers,
Graham

Re: What constitutes a business… as graham said, there’s no strict definition, and a little room to move.

The criteria generally considered in determining whether an activity is a business are:
-significant commercial activity
-a purpose of acting in a commercial way
-an intention to make a profit
-a reasonable prospect of profitability
-repetition or regularity of activity
-reasonable size and scale
-conformity with normal business practice
-existence of a business plan
-keeping of detailed business records
-commercial sales of product
-exercise of knowledge or skill (Taxation Ruling TR 97/11).

Furthermore, the definition includes “an activity done in the form of a one-off venture in the nature of trade”. For Example, the ATO considers that buying and renovating a commercial retail store with the intention of reselling at a profit would probably constitute an enterprise. However, simply because a profit has been generated does not in itself mean that an enterprise exists. (see GST Ruling GSTR 2001/7)

Based on all that, researching, buying, renovating, and selling, even one property could constitute a business, provided your primary intention is to turn a profit. However, given motivation you could argue that its not a business. As graham pointed out.. you could probably get away with that once or twice, but after three your starting to look more and more “repetitive and regular” That said.. 2 reno’s every year, 5 years in a row, looks pretty regular too.

As terry pointed out… for residential properties you only have to pay GST on properties which are “new” (less than 5 years old, and has not been sold before) OR “extensively renovated” (see GST Ruling GSTR 2003/3) However, in mav’s proposed example, partially renovating existing houses, the sales will be considered to be “input taxed” – so no GST is payable and input tax credits for acquisitions relating to the sale are not available.

So being considered a business would simply mean you can not claim the main residence exemption, and would not, in itself, mean that you have to pay GST.

This is definitely a situation in which you need to explain to a qualified accountant exactly what your intentions are and listen to what they have to say.