capital gains - 12 months .... 50% discount - clarification

Hi

I'm wondering if I have owned an investment property for 3-4 years.
knock down the existing house, develop it with say 4 townhouses with a strategy of holding them all, but decide to sell 1 within 6 months of completion.
Would I be subject to no capital gains discount as its within 12 months of the build completion....

OR

for the fact that I have owned the land for a number of years, regardless of how soon after build completion that i sell 1 townhouse - that I do still qualify for 50% discount on CGT.....?

 

Assuming CGT applies it would be the date of the land ownership.

But CGT may not apply.

 

You will incur GST on the sale of the house.

You might be able to apply the margin scheme for the sale.

 

Just be aware if you want to apply the margin scheme you need to get advice before you sell and make sure that it is included in the contract. You can't sell and then ask your accountant to apply the margin scheme to the sale.

This will seem obvious to someone like @Ross Forrester but it has actually happened that a property was sold and GST was not in the contract

 

Tip : Get a land valuation by REGISTERED VALUER at the time of demo that is based on the best use of the land (ie land value with a DA and with expectation of 4 future townhouses).

This will close an exposure to ordinary profit from the land development and allow most and perhaps all of the profit to be applied to the CGT event for creating trading stock. This will assist to protect the 50% CGT discount.

 

yes as Paul says interaction between the trading stock provisions and CGT provisions is critical.

seek advice as this isnt an easy area

 

Paul raises a good point, CGT may apply up to the time it becomes trading stock and then there is a deemed disposal.

 

Terry - Here is a tip most accountants dont know about. I shouldnt share.

Many people fear the CGT event and think it means paying CGT in a year when there is no sale. Well they may be right BUT there is a ATO concession that addresses the problem.
Example follows of a 2015 CGT event when say a former IP becomes land for a subdiv and it will take 12mths and be sold for profit.

1. 2015 : Prepare and lodge tax with NO CGT event reported.
2. 2016 : Complete dev and sell
3. Prepare and lodge 2016 and report ordinary income (profit from dev)
4. Prepare and lodge an amended 2015 return and now include the CGT event.

Write to Commissioner if penalties or interest imposed for the amended issue and ask for concession as the CGT asset was not physically sold until 2016. You must amend the year when the trading stock CGT event occurred but they allow this to be backdated even if its past 2 years.

The ATO are reasonable and do allow the timing of the tax to coincide with sale/s.

 

Another option is to borrow to pay the CGT. The entity would now be in the business of property and could claim the interest on the loan too.

 

Business ...perhaps. A enterprise caught for GST doesnt mean its a business capable of borrowing to pay tax. Ordinary income is not always a business. IMO its risky without seeking tax advice. Fred the Builder - Probably OK but Joe and his wife selling off a battle axe subdiv house may not pass the tests.

And since a deduction merely gives 1/3rd or so as a benefit, avoiding incurring the cost is preferable to using borrowed money.

 

I thought we were talking about trading stock!

 

My head hurts

I need to read up more...
- margin schemes? - is that about applying the GST if I plan to sell one of the townhouses...
- If I'm holding them, should I still apply the gst - or assume its not required...
- Registered valuer - getting that done at demo time (i guess a yr earlier than when project may be finished - I'm thinking exposes me to a lot higher land tax valuation and land tax fees? or do the other benefits you mention outway this.... (ordinary profit vs all profit? trading stock?)... is it possible to give a small example for the layman... (but thanks I will consult my accountant in due course too)
- why is interaction between the trading stock provisions and CGT provisions critical??

 

Because you might have to pay CGT even before you sell!

 

Some more head pain. Developer toolkit explains many concepts....