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CGT Calculation Help!

Discussion in 'Accounting & Tax' started by Blackmores, 26th Jul, 2016.

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  1. Blackmores

    Blackmores Member

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    Hi guys, I have some questions in regards to CGT.

    We are currently building 3 townhouses on a large block of land. The land is currently owned by our family trust with a corporate trustee.

    I was wondering how does the CGT work when it comes to such developments. For example, let's say the land was acquired for $1m a while back, construction cost and permits etc another $1m. We intend to move into one of the units and sell the other 2 for $1m each.

    Assuming equal value for all units, my capital gains will be $2m (2 units) - $666,666 (2/3 land cost) = $1.33m?

    Can we take into consideration construction cost as well to calculate capital gains? Meaning $2m - $666,666 (2/3 land cost) - $666,666 (2/3 construction cost) = $666,666? Then the $666,666 will be distributed to me and wife to be taxed.

    GST will be $2m - $1m = $1m * 1/11 = $90909.00

    Is this the right idea? Just need some guidance before meeting my accountant. Thanks.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    First thing to determine is whether CGT even applies. Developments are usually done with the intention of making a profit on the sale so it would more likely be on revenue account than capital account.

    This could also trigger a CGT event even before selling - you may be holding on capital account now, but the point in which you start to hold the property as trading stock could be a deemed disposal and therefore a CGT event.

    you will need some good tax advice on this.
     
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  3. John Bone

    John Bone Well-Known Member

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    There is no CGT on this deal, it is a trust so the intention to develop is clear. The net profit will be distributed to the beneficiaries of the trust and the distribution will be added to their personal income for tax at their marginal rate of taxation. There will be no 50% discount, the profit is fully taxed. If the beneficiaries are currently at rates of taxation in excess of 30% then create a new company and distribute the profit to it. This will cap your tax liability to the company tax rate. Then use the money from the company to fund your next deal.
    GST will be payable on the total sales less the purchase price of the land (the margin) and you can claim ALL the GST paid during the deal as an input credit.
     
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Blackmores - Not only no CGT but also GST issue. My developer toolkit includes a guide that explains all the concepts if you want to build knowledge before discussing with acct. The danger with a disc trust undertaking these sorts of activities is if you get the trust distributions wrong by miscalculating profit you can end up with the top marginal tax rate. But you can also have a corporate beneficiary and limit tax to 30% (Not 28.5% as the small businenss turnover is exceeded)
     

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  5. Blackmores

    Blackmores Member

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    Thanks John. I will keep that in mind.

    With the GST, so for the entire project, my GST liability will be.

    Let's say,

    Land $100k
    Development $100k
    Sales $100k x 3 = $300k
    Profit before tax to keep things easy = $100k

    GST -> $300k - $100k - $10k (GST claimed on development costs) = $190k

    1/11 * $190k = $17.8k -> Goes to tax office.

    Net profit

    $100k - $17.8k = $81.2k which will then be distributed to our personal income taxes and taxed accordingly. Let's say me and my wife 40k each.

    Am I right? Any there anymore taxes, GST or any other liabilities to pay?
     
  6. Blackmores

    Blackmores Member

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    Thanks Paul. That is very useful. I will have a read through.
     
  7. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    This won't always be the case. If the land was not originally acquired by the trust for the purpose of developing and reselling at a profit (e.g. it was acquired originally for the purposes of deriving rent) then a subsequent development could be considered a 'mere realisation' of a capital asset and still subject to CGT. This conclusion is heavily dependent on the particular facts and circumstances. In some cases, as @Terry_w said, you may shift from capital account to revenue account prior at some stage during the development (you will have a capital gain/loss prior to this point and a revenue gain/loss after this point).
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Factored in land tax?
     
  9. Blackmores

    Blackmores Member

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    Hmm Land Tax. That's the one to the SRO isn't it for having properties under the corporate trustee. I think I am paying about a couple of grand a year. Does that sound right?
     
  10. John Bone

    John Bone Well-Known Member

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    I agree with Daniel in part. If the property was initially acquired to derive income then (there was no mention of that) and income was actually achieved then there is an element of CGT to consider. There is a time consideration as well. The ATO will not accept a situation where you buy a property for cash flow and then 3 months later you decide to develop it.
    My answer was based on the assumption (and that may have been incorrect) that the "Block of Land" was acquired for development. It is logical to assume that a "Block of Land" would not attract any income so any notion of acquiring it for that purpose would be a nonsense.
    One way to deal with the situation if the property was a rental and there is some capital gain and that is to "Sell" the property to another trust. There would be stamp duty to pay but it would crystalize the amount of the gain and attract the 50% discount if owned for more than 12 months. It would also establish the purchase cost for the calculation of the margin scheme and result in substantially less GST. Given that GST is 10% and stamp duty is only about 3% you should end up in front.
     
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  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Not really. Land Tax is a tax collected by the SRO for owning land - but there is a lower threshold and a higher tax for trusts.
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Or if the enterprise to develop intends to produce profits from a business venture (not just if its profit making dev!) it could be that a CGT event (K4) occurs by default when the land is held as trading stock. Problem with that however is it could dent cashflow. A CGT profit in one year and a revenue profit in others.

    CGT event E5 may also be useful to trigger a capital gain :)
     
  13. Marg4000

    Marg4000 Well-Known Member

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    Just wondering why you did not clearly understand possible CGT and GST liabilities at an earlier stage of your development as surely these impact on profitability....
    Marg
     
  14. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Marg - I am astounded by how many seek advice after the dev is completed. I question how a plan to produce profit could even occur. Way too many assume that you buy land, build and sell and a profit happens. It does sometimes if the right factors exist. But with GST taking up to 5-7% of the sale price off profit and tax rates of 30-49% the final profit is way way less than expected just after taxes.

    I often see many who budget 30%+ margins and then find its far far less.