Tax Q&A: Builder went bust

Question: I bought a block of land in Victoria for $150,000 in January 2016 and paid full stamp duty on it. I also paid a builder a deposit of $20,000 to build my house, in which I intended to live, but he went bankrupt without doing any work.

I am now selling my land for $245,000 minus a $10,000 real estate agent’s fee, and am also buying a house for $575,000. What are my CGT and stamp duty obligations in this scenario? My yearly income from my job is $86,000.

Regards, Yas

Answer: Great question, Yas!

First let’s consider whether the sale of the block of land is a capital asset subject to capital gains tax (CGT). In this scenario, as your intention was to use the vacant land for private purposes to build your home and not to make a profi t-making venture, the sale would be subject to CGT. 

However, the main residence exemption from CGT unfortunately cannot apply, as no dwelling was ever built on the land. Understandably, your builder’s bankruptcy was beyond your control; however, merely having the intention to build your main residence on the vacant land is not enough for the sale to be CGT exempt.''

Therefore, the total CGT payable will be based on the following: The builder deposit of $20,000, real estate agent’s fee of $10,000, and the stamp duty paid upon purchase will be added to the cost base of the land. Based on State Revenue Office Victoria land transfer (stamp) duty rates, we have assumed this to be $4,070.

• Total capital gain = capital proceeds less the cost base; that is: $245,000 − ($150,000 + $20,000 + $10,000 + $4,070) = $60,930

Assuming that you have Australian residency, and as you have owned the land for at least 12 months you are therefore entitled to a 50% CGT discount, the assessable capital gain will be:

•  $60,930 discounted by 50% = $30,465 taxed at your marginal tax rate

As your yearly income is $86,000, the vast majority of the assessable capital gain will be taxed at 39c for every $1, which amounts to circa $11,701 payable in CGT. Ongoing expenses incurred, such as council rates and loan interest (initially not deductible, as the land did not generate income) should also be added to the cost base, further reducing the total capital gain.

On another note, your stamp duty obligations will arise from the purchase of your new home. The amount depends on the location, dutiable value of the property, and what it is used for.

As this is a legal matter, be sure to seek guidance from your solicitor to see if you’re eligible for any exemptions or concessions. 

Overall, taxpayers occasionally fear the potential CGT payable on disposal of assets. Sitting down with your accountant and running through the numbers may not be as daunting as it initially seems. The sale proceeds will assist in funding your new home, and knowing the CGT payable will ensure that this can be budgeted for well in advance of the payment due date.

Need to know:

- If no dwelling has been built on a piece of vacant land, CGT exemption does not apply

- Costs such as stamp duty can be added to a property’s cost base.

- If an Australian resident owns land for 12 months plus, the 50% CGT discount applies.

Catherine Simons

is COO of WSC Group