Calculate Costs and Profit

Discussion in 'Accounting & Tax' started by StoneBridge, 25th Aug, 2018.

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  1. StoneBridge

    StoneBridge Member

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    Hi,

    I have a property construction project nearing finalisation. I demlished a house to build 4x townhouses. Im trying to understand (and navigate) the tax and accounting implications of selling the houses. Most importantly, a rough formula to determine what profit will look like at the end. Can someone assist? I came up with the following

    Gross profit equals
    sale price
    less GST (margin)
    less costs.

    Can someone help me understand what goes in to the cost section. Does this include the purchase of the initial land/house component and all the costs to build (interest, build contract etc). Or is it a sub component only?

    I understand CGT needs to be considered to obtain net profut.
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Cgt normally has no relevance in a sale involving GST

    Tax advice usually occurs earlier
     
  3. Mike A

    Mike A Well-Known Member

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    agreed with @Paul@PFI this project is on revenue account. you might need to consider CGT if the property was originally held as a CGT asset and it then moved into either trading stock or a profit making scheme. then need to understand the interaction between section 6 revenue and s 118-20 to prevent double taxation of the CGT issue.

    what about the GST you have claimed as input tax credits along the way ?
     
  4. Apprentice

    Apprentice Active Member

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    If the property was originally held as a CGT asset and the construction of the 4 townhouses occurred. What would the tax implications be if sold on completion ?
     
  5. Mike A

    Mike A Well-Known Member

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    Need to consider the interaction of the revenue provisions s6 with the CGT provisions.

    Also factor in GST
     
  6. Apprentice

    Apprentice Active Member

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    So at what point would the CGT provisions cease and the revenue provisions commence>
     
  7. Mike A

    Mike A Well-Known Member

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    They interact with each other. Section 118-120 ensures no double tax

    Generally, it will be considered to have converted into a profit-making scheme when you have committed to do so. Lots of case law that determines when that point actually occurs. In Stevenson, the court held when the taxpayer entered into an agreement to spend money on the sewage and supply, was the time it became a profit-making scheme not when the actual works were completed.

    Its a 3 step process to work out the taxable amount.
     
  8. Apprentice

    Apprentice Active Member

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    Can that point be when a DA has been applied for and approved ?
    In Melbourne, is the DA the planning permit, building permit or architectural drawings or all of them?
     
  9. Mike A

    Mike A Well-Known Member

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    Could be any point. Maybe earlier. Would need more facts.

    See an example from ato

    Example 9 - Time of commencing development

      1. An owner held 100 hectares of unimproved rural land acquired in 1983.
      2. In 2010, the local Council, of its own accord, rezoned the land from ‘Farming’ to ‘Residential’.
      3. Previously, in 2007, the owner had entered into a contract with an unrelated developer to sell the unimproved land for $10 million, which did not proceed to completion.
      4. The developer attempted to gain Council approval to subdivide the land into 880 residential lots in 2008, but was unsuccessful.
      5. A new developer was engaged in 2009 to lodge another application with the Council, but the contract with the developer fell through.
      6. Later, another new developer was engaged, and after several attempts was successful at gaining approval for a smaller number of lots, with some land to be sold to the local Council in 2011.
      7. After receiving approval from the Council, the owners sold the 2 lots to the Council for a total of $12 million.
      8. The developer also developed the remaining land for sale.
      9. The development agreement included fee clauses that required the owner to pay a development fee to the developer of 5% of the sale proceeds for each lot, in addition to agreed development costs.
      10. Work done on the remaining lots included roads and drainage and some head works.

      Our position
      1. Weighing all of the facts together, it is arguable that the owners entered into carrying on a business in 2007 when they attempted to redevelop the land. Whilst there were some short periods of nil activity, they continued in this pursuit until successful in later years. In the alternative, it is arguable that they entered into a profit-making undertaking or scheme at that time to develop the properties for sale. The degree of financial risk borne by the landowner (i.e. the landowner is the party principally at risk if 95% of the sale price of the completed lots does not exceed the sum of the development costs and value of the land when the development commenced), together with the intensity of the subdivision, is also persuasive.
     
  10. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Application for a permit may be the start - Or when other efforts were explored and acted upon. eg Two years earlier if there were efforts incl drawings and meetings with town planners etc to explore and cost the likely plan to develop. Its possible too that it goes back to the date acquired if it was in a urban fringe, idea of future dev was contemplated when acquired etc....Many people buy land and just because it has a crappy old house you can rent it doesnt mean its a CGT asset
     

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