1 into 2 lot Subdivision Tax implications on completion

Hi PCers

Wondering if any subject matter experts such as @Terry_w or @Paul@PFI could help me with this one. I tried discussing with my accountant but the response I got was that its a bit of a grey area so I've come here for answers.

I've just completed your typical 1 into 2 lot subdivision on a property I have held in Logan for over 12 months that has been rented out throughout.. There are options and would like to know how they sit from a tax payable scenario. It will as you could appreciate have a major bearing how I plan my next move. I need to have the right structures in place to from a lending perspective.

The original house that was bought for $350,000 (+$15,000 purchasing costs) will be sold in the next month for $308,000
So with purchasing costs, approx. $300,000 will be realised from the sale for a capital loss of $65,000. These funds will most likely be used for the construction of the new build on the newly created lot if that preferred option is taken.

The newly created lot (Land) will be either sold or built on by me.

1.If I decide to build on the new land and keep long term as a investment rental would tax be payable or only if sold and would the capital loss of existing house be factored in.

2.If I "clear the decks" and sold all assets on the land what tax would be payable?
Existing house loss from sale $65,000
Gain from sale of new block of land ($240,000 - $85,000 subdivision cost) $155,000

3. If I just sold the newly created land and kept existing house how would this capital gain be taxed. Do I still get the 50% discount or would I have to wait another 12 months from when the new block of land was created?

Sorry for the complex question but have been digging around trying to get answers without any luck so thought I would turn to the experts on PC. How would the 3 scenarios play out from a tax payable amount?

Cheers, YoungBull

 

Read the Developer Toolkit ?
Buying to sell for profit is different to holding on capital account longer term. Also GST reduces profits OR increases them if you make wise choices. GST will impact your choices !!

Its not grey. Planning to sell after incurring dev costs clearly indicates a intention.

1. personal tax advice needed
2. Personal tax advice is needed.
3. No need to wait. Likely no capital gain however. Personal advice would confirm issues

 

Not a grey area, just sounds like your accountant doesn't understand.

You will need to apportion costs between the 2 blocks so probably no loss.

 

The ATO says you have to apportion on a reasonable basis - which may give some slight flexibility, but using valuations should be the way to do it.

 

Thanks for the reply @Paul@PFI ,

I had a read of the attachment and its quite complex but there is a major point I picked out:
If I have no intention to sell the newly developed build after 5 years its exempt of extra taxes?
Is this correct.

regarding the 3 scenarios you are saying if I did choose option 3.Sell the newly created land that no capital gains tax would be payable?
What sort of ballpark extra figures would I have to keep in mind if I kept the new block of land to build and keep and selling existing to make it happen?

 

Thanks @Terry_w for getting back to me. When you say no loss as I need to apportion costs between the 2 blocks does that mean I could be now tax payable on the existing house sale even though i'm taking a hit?
In regards to my different scenarios would it be fair to say that the easiest solution is to sell the land and keep existing therefore no tax is payable? @Paul@PFI @Terry_w

 

Yes you could end up paying tax. Not sure what you meana about taking a hit - would you be selling at a loss?

Why do you think no tax would be payable on the sale of the land?

This thread may touch on some aspects of your question:
Tax Tip 43: Demolishing PPOR and Subdividing land and building 2 houses https://propertychat.com.au/communi...-subdividing-land-and-building-2-houses.4364/

 

I mean "taking a hit" is just a reference I'm using to say that if the existing house is sold I would be $65,000 down from my original loan on the house as I would end up with $300,000 with a $365,000 owing debt. I would then if I could try use these funds for the project next door on the vacant block and try for a transfer of security. I just don't know if there is any extra cost involved with tax payable or only until such time if I was to sell the new build in the distance future.
Regarding if I choose the other option of keeping existing and selling land my early thoughts and finding before I've been confused from the accountant today that,
the land value would as you guys mentioned be proportioned up so in this instance rough figure,
Council rate total loan $148,000
Divided into 2 = $74,000
$74,000 + $85,000 sub div costs
Sale of land $250,000 minus $160,000 cost base= $90,000
$90,000 divided by using capital gains 50% discount.
approx $45,000 payable on your PAYG rate?
Does this sound right @Terry_w @Paul@PFI @wylie
How does this figure compare with the figure I have no idea of to build and keep the new build with selling existing. I need the know difference roughly for so I can make a quick decision tomorrow.
Sorry for these questions but I need this knowledge for tomorrow.
Cheers, Youngbull

 

have a read of this thread again, you are missing something obvious - apportionment wouldn't be 50/50 if one block has a house on it.

 

ATO view is that a taxpayer lacks abilities to reasonably apportion non-homogenous land (ie house on one and other vacant etc) and therefore a land valuer must advise on the SPLITTING of the original cost into two portions.

Same as the loan. If you had a loan for $360K before the subdivide and you sell off some then a portion of the original $360K loan becomes non-deductible when the portion is sold. Too often I see people who think in terms of cash but CGT profit is not about cashflow. CGT calcs dont factor your loan repayments into the calcs. If you pay off debt it means you may not have cash to pay tax biut it doesnt mean you didnt make a profit.

 

What did your tax adviser say ? I dont see a CGT issue here. I see a income tax issue. And GST perhaps.

 

Thanks @Paul@PFI for getting back to me.
I spoke to a more savvy accountant today so I think I have my head around it now and have some more clear answers.
Therefore my calculations and answer I got if I sold all was ;
If you sold the whole lot then it would just be the gain between the sale price, less purchase costs, less development costs, less selling costs. This figure would then be discounted by 50% and you would pay tax at your marginal rate.

In this instance my gross profit would be $89,000 so applying the CGT discount I would pay $18,690 tax in this event.
Does this sound right to you?

If I sold the existing house and kept the land I would then have to pay $14,910 CGT tax on the $308,000 sale of house
As cost base would reduce for example;
Cost value of land at time of purchase; bank value $190,000
$87,400 46% of land
+$150,000 house valuation
=$237,400
Therefore sale $308,000
CGT profit $71,000 Divided by 2
$35,500
Tax payable $14,910

Is this all sound correct?

Cheers, Youngbull

 

Impossible to say.
how did you get 46% and $150k?

 

The 46% is the proportion of land (Lot 2 is 462m2 of the once was 996m2) that was valued at $190,000 land component at time of original bank value. The house component was $150,000 which has always sat to the side of Lot 2. Total purchase price at the time was $350,000 ($190,000 + $150,000)
Therefore cost base is $87,400 + $150,000
I could well be wrong but this is my understanding from the accountant.

Do you believe that my calculation in the scenario of selling everything was correct in the previous post to Paul?

It appears my best option if it was to "pay lees tax" would be to go with selling newly created land and holding existing. Its this true? @Terry_w @Paul@PFI

I'm not wanting to self indulge on the site but wouldn't want anyone else out there or newbies like me get caught out like I have and not taken these tax considerations into account. That's why a lot of us are on Pc, to learn...

 

Is it worth getting a quantity surveyor out on site now that may give a higher land and house value than the original bank value which could reduce my tax payable? @Terry_w @Paul@PFI

 

You would need a valuer.

 

No. To pay less tax you would just hold!