CGT from rezoning??

Hi, we are in negotiations with a landowner for a land subdivision site that is currently in a conservation zone, but can be rezoned to allow residential lots.

The terms we have offered are to settle after the rezone, in approx 2-3 years.

The landowner is happy with our offer and took it to their accountants. Their accountant said there could be CGT issues that they will need to look at.

The landowner has owned the land since the 1970's, so its a pre CGT asset.

The accountant indicated the CGT issue would be in relation to the rezone, as the landowner would still be the landowner at the point of gazettal of the planning scheme amendment (rezone), although they would be passive as we would be running the rezoning as per a contract of sale.

Have you heard of any issues to pre CGT assets where their is a change of us of the asset during settlement period? Ie the rezone.

We have a few other rezone sites, but didnt have this issue, but i dont believe any of the others were pre CGT assets.

 

Rezoning is not a CGT event. Full stop. Here is a list of CGT events. A1 is the possible event ?
CGT events

However the issue here may be the land being a element of a enterprise. If the landowner does NOTHING but merely is party to a put & call option and gives consent for applications for zoning on bahlf of a potential owner etc then they may not even be a element of the enterprise. They want to avoid involvement as far as possible to avoid GST and other NON-CGT issues. If a CGT sale with deferred settlement based ona undetermined value then its a earn out arrangement that means when the value for setlement is known in the future the owner may need to amend the PAST returns to reflect the contract date. If the value is known today then its a CGT event at the contract date that can also be deferred until settled under a little known ATO concession. The use of P&C options defers the CGT event itself.

Property savvy tax advisers will know these concessions and issues.

Rezoning merely affects land use, and hence value. The less the owner does the better. I think they have poor advice as its described.

 

"Improvements" may be an issue

 

Can you expand on this?

 

s108-55 ITAA97 can cover intangible improvements too.

 

Ok, as the land component is a pre CGT asset and not subject to CGT at the time of sale. If the dwelling on the land was built after the CGT introduction date, then only it will be subject to CGT. So an apportionment of the proceeds will be required between land and building, and then CGT applied to the building component. Is that right?

 

improving the land can make it a post CGT asset, if part or in full.

 

When i read s108, it discusses seperating the capital improvements (new house, house renovation, new fence, etc) from the land component, and creating a new CGT cost base for that capital improvement. It mentions exemptions based on a 5% rule and cost threshold amounts.

All the examples ive seen are works related and tangible. I couldnt see any examples of intangible improvements.

Would a permit or rezone event ever be seen as an intangible improvement?

 

since it would add value to the land it would be an improvement

 

Alright, so if the rezone event is viewed as an improvement, would that event become a seperate CGT asset from the land? And would its cost base be the at the time of the rezone event?

So if the settlement of the land was shortly afterwards, then the CGT liability would be minimal?

Note the landowner is getting their own accounting/legal advice, this discussion is just to get my head around it. And its fun discussing this stuff.

 

have a look at TD 2017/1
https://www.ato.gov.au/law/view/document?docid="TXD/TD20171/NAT/ATO/00001"

Ruling

1. Yes. For the purposes of subsections 108-70(2) or (3), intangible capital improvements can be a separate CGT asset from the pre-CGT asset to which those improvements are made if the relevant thresholds are satisfied.

Example

2. A farmer, holding pre-CGT land, obtains council approval to rezone and subdivide the land. Those improvements may be separate CGT assets from the land.

 

note that this is only the ATO's interpretation of the law!

 

Great stuff, so the rezone/permit event could be viewed as seperate intangible CGT asset.

How would this affect a sale for the landowner. I'll make up some some numbers in an example below:

Value of land day before rezone: 1m
Value of land day after rezone: 2m
Value of land at settlement 1 year after rezone: 2.5m
Soft costs in getting the rezone through planning/DELWP: 100k

So in this example, the rezone event created a 1m uplift in the value of the land, for the cost of 100k.

So would the cost base for this rezone asset be: 1m 0r 100k?

Then when settled, the value of the rezone event is 1.5m, so is the capital gain 0.5m or 1.4m?

 

Cost base would likely be the costs for the rezoning. So a potentially a large capital gain.

 

Could an option be beneficial in this situation, instead of a contract of sale?

 

Or even a development agreement?

 

Hmmm, thinking a vendor finance arrangement could be a possibility, where settle a few weeks prior to rezone, with the vendor financing 50% of cost as a vendor finance arrangement, then refinancing them out after the rezone/permit when the valuation of the property will be stronger.

 

That is something the should seek their own legal advice on. If they are entering into a contract that might be the taxing point.

 

I'd be careful going down the conservation land rabbit hole. Heaps of issues around this itself alone.

 

We are pretty confident from the planning perspective, we are only developing a portion of the site that is within the urban growth boundary, the remainder of the land will be gifted to council for public reserves/parkland. Our planner used to work in the growth/strategic planning section of this council and still does contract work for them. And the abutting titles have already done what we are planning to do. Having said all that, there is always risk so we are hoping to make our offer 'subject to rezone/permit'. But based on the discussion above it might change or we might walk away.

Whats your experiences with conservation zoned land? Any stories?