CGT/GST on sale of subdivided land

Hi Experts,
I am finally at the business end of my subdivision project and was just hoping to clarify my position in terms of CGT/GST. I plan to speak to my accountant but always like being prepared for these conversations.

Property was purchased 4 years ago and lived in for close to 2 years before I began the process of the subdivision. I am 100% confident I could prove to the ATO that this was a mere realisaiton of an asset and not an attempt at making money.
I kept the front property which the entire time was my PPOR and renovated it last year before selling it on new years eve last year. I am personally confident this sale will not carry any CGT with the PPOR exemption.

I now own a vacant block of land which will go to market in the coming weeks and this is where It gets a bit hazey as to what taxation costs will be involved. I raised this a couple of years ago and spoke to someone who said it may actually fall under GST and the amount payable would be around 5-10k.

Can anyone shed some more light onto this and specifically:
Is it more likely to be a CGT or GST event?
How is the profit set between the PPOR which is exempt and this newly vacant block? How does the ATO determine what has more value? Or do they calculate on sqm?

What can be added into the cost base for the vacant land? Can all costs associated with getting the planning permit and subdivision permit be added into the cost base?

Thanks in advance

 

Is it more likely to be a CGT or GST event? GST is a separate issue to income tax. They are independent but related. GST rules are based on taxable supplies being made. Selling under margin scheme ? Claiming GST on inputs ?

Profit must be calculated by apportioning the cost base of the pre-subdiv costbase. A registered valuer is generally needed to apportion that historical cost between the house+ land and the vacant block at that time. You wont have the required skills to do so.

I make a living from giving advice to people who are all certain of their tax issues too.

 

It could be subject to CGT or income tax depending on the circumstances. There can be no main residence exemption if it hasn't have a dwelling on it. I think I wrote a tax tip on this sort of thing - similar circumsances. Tax Tip 43: Demolishing PPOR and Subdividing land and building 2 houses

GST applies for the first sale on new residential land if this is an enterprise.

You need specific tax advice.

 

Haha thanks Paul. I should say "certain" to the best of my knowledge reading these forums the past 2 years

Thanks Terry. Could you eleborate on "depending on the circumstances"? What exact circumstances would differentiate this from being CGT or income tax?
Regarding the tax tip the main dwelling was never demolished, it was renovated and sold.

 

Basically if you intend to keep a property for rental purposes it is held on capital account and CGT applies. However if you buy with the intention of selling then income tax could apply. Its a very complex area and there could be a point in time where a property goes from capital account to income account.

 

Sounds extremely complicated! I will chat to my accountant and get his feedback.
Can I ask though are there accountants who specialise in property, particularly CGT? My accountant is good in areas but in some discussions regarding property I feel I sometimes am explaining stuff to him (albeit I read here but none the less).

Not that it's a bad thing but you just can't expect an accountant to know all! I work in IT managing projects and atleast monthly I get friends asking me if I can make them a website or build them an app. I wouldn't know where to begin!!

 

Yes, like any area there are some who concentrate on certain areas. Try Paul above or Mikelivingthedream who both do many property related taxpayers.

 

Only personal advice could address that. I would generally recommend you carefully present facts to ATO and seek their confirmation as a BPR to avoid penalties for recklessness. I say carefully as its very easy to use a wrong word or description and ATO will hold you to it. Mere realisation is a common law concept and is not described in statute.

The concern I would have is that a mere realisation may occur where it is a simple plan. ie sell off part of a large block and do no more. A more complex plan may involve renovation of the home as well etc so that the "project" is more detailed especially where both properties are sold in a relatively short period of time. And leading to return greater profits. I have seen taxpayers nailed because they bought a corner lot and promptly applied for a DA and soon built one, developed one, reno one sold both etc. Sure they live in one as it may well be exempt but the other may not even be a CGT asset. ATO are happy to look at your finance applications and DA to seek your intentions and hold you to them. I would also expect the ATO would diligently look at the actual occupancy of the home too. eg substantial reno can trigger GST on it if it becomes non-habitable during the build. And it could lose the MRE too if its doesn't meet the occupancy test after reno is completed if that applies.

The 50% CGT exemption and 100% MRE are often attractive lures for avoidance and ATO know it.

 

Thanks Paul, I definitely appreciate your response and if I feel my accountant is not up to this task I would love to engage your services come tax time.

And whilst I "assume" something it may in-fact not be the case.
That being said, knowing the full story of this block and the reasons behind purchasing and then ultimately subdividing and selling, I am confident I could stand in front of the ATO and prove myself.

 

Hey guys,
Just on the apportioning and this is very simplistic but would it work something as follows.

Purchase Price -586k
House Value prior to renovation - 90k (I have two bank valuations both at 90k)

So if I deduct the dwelling then I am left with a land value of 496k. The land size is 651 so if I divide that I am left with a per sq value of $761.
The rear vacant lot is 355sq so it's original value is $270,000(rounded).

My brother and I have agreed on a sale value of $345,000 for me to purchase this land from him. So the gain on the rear land is 75k of which is split at 37.5k each.

Now assuming I am exempt from a gain on the front property I have no CGT to pay as I am purchasing the back not selling.

My brother however will have a gain of 37.5k but to that he adds a cost base which would include stamp duty, interest and parts of the subdivisin cost? If so then there would be very little gain left in the vacant block as most of it would have been made from subdividing the front and keeping the existing dwelling?

 

1. You can't use a valuation to apportion cost base that way. The original COST must be apportioned between the two titles by someone capable of doing this. The ATO don't accept a valuation of one to extrapolate the value of the other.
2. The non-arms length price must be converted to a market value. The OSR will require this also for duty.
3. $37.5K each ?? You bought from him. You don't have a cap gain.
4. CGT calcs are made inclusive of portion of duties etc. Not deducted after

You don't subdivide one block. A subdivision take a single title and creates multiple titles and multiple assets. Costs are borne etc by all lots not one or the other.

 

Thanks again Paul!
1 - Who is capable of doing this? And when is it best to engage them? I am guessing prior to submitting next years tax return
2 - Who converts it? I thought 345k is the market value as that is what i have paid for it and is going of 4 bank valuations (wanted to be sure of a fair price).
3 - Yes I am buying from him so as far as I know I have no cap gain but as you said before this is a grey area, especially on the front dwelling which had a considerable gain.
4 - Not sure i understand that