Builders beware: ATO closing the primary place of residence loophole

A popular method of avoiding taxation in the past has been to buy a property, build or renovate, live in the residence for twelve months (satisfying the appearance of ‘primary place of residence’), then selling the property – and buying another property to repeat the cycle. This takes advantage of exemptions to capital gains tax (CGT) and goods and services tax (GST) when selling one’s primary place of residence, but allows a steady income flow from the property sales.

This method of buying, building, residing and then selling within a relatively short period has recently come under increased scrutiny from the Australian Tax Office (ATO), as there is a clear indication that the behaviour is due to a desire to make money, not a need or desire to change one’s primary residence. Profit-making ventures have been targeted for taxation, across the board. If you’re repeatedly making large profits from a specific activity, the evidence will point to it being a profit-making venture, and the ATOwill want its piece of the pie.

You might be wondering how the ATO will know?  While this sort of money-making behavior largely flew under the radar for many years, due to difficulties in matching property sales records with tax records, that’s no longer the case. The department receives data from all property title transfers, and with data matching technology improving so much over the last couple of decades, they now find it quite simple to automatically detect patterns of buying and selling properties labelled as primary dwellings. Being able to match every title transfer to a Tax File Number (TFN) has made this data matching much more powerful, and made it far more difficult to escape the eye of the ATO.

Anybody who has been following this pattern of avoiding taxes by buying, building/renovating, temporarily residing and then selling may soon find the ATO catching up with them. If the department does determine their activity as a profit making business venture, and they therefore can’t claim an exemption for a primary place of residence, then they may end up liable for GST, income tax or CGT on not just one, but on all properties they’ve sold if the ATO assesses the activity to be a profit making venture!

If you are concerned that you may have been engaged in this activity unknowingly, then we emphatically recommend you speak to your tax professional, and get some help in taking a closer look at the facts of your situation, and what you can do about it.

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