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CGT implications - Townhouse Development

Discussion in 'Development' started by johnnyt, 7th Mar, 2016.

  1. johnnyt

    johnnyt New Member

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    Hi all, I need some help with understanding what the CGT implications will be on my development. I currently own a property which is being rented out that we plan to demolish and develop 2 or 3 townhouses on. I bought it in September 2015.

    I am looking at living in the front townhouse once complete and that will be my new PPOR. I will be selling my current PPOR prior to moving in. The other 1 or 2 will be sold off. I want to know how CGT will apply to those sales and will the front townhouse be exempt or receive a discount on CGT when and if I choose to sell.

    Thanks in advance
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It sound lime it is currently an Ip so you wont be able to sell one cgt free even if it does become your main residence.

    Cgt may apply to a certain point and then it could be income tax.this could be a cgt event itself.

    Gst could apply on the sale.

    You have to consider the deductibility of interest aspects too as well as loan structure.

    See my tax tips on developing.
     
  3. Blacky

    Blacky Well-Known Member

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    Consider applying (if possible) the margin scheme.

    But yeah, CGT, GST and income tax could all be applicable.

    Time (well, actually its late) to speak to an accountant for specific advice.

    Terry or Paul (@Paul@PFI) would be a good start.

    Blacky
     
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    There is a CGT event that occurs when the property ceases to produce income and commences to be trading stock. This can create a strategy to take profit using CGT rules BUT it also means a cashflow issue. The alternative is to use cost as the development cost but then this maximises income tax profit.

    The existing property may be eligible for scrapping deductions so get advice from a QS before demo !!

    There will be GST issues (even for the home) and diligent records of costs will be required. The sales will be subject to GST but may be minimised through the margin scheme. Timing etc of deductions etc needs to be understood as well as apportioning for the one you plan to keep.

    If and when you choose to sell the new IP, GST may still be payable.

    Personal tax advice to understand the full scope of issues would be best.
     
  5. johnnyt

    johnnyt New Member

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    Thanks both, well nothing is set in stone yet, it is at the moment just an ip that is rented out. I have not committed to anything re the development. Still have to do feasibility so this was one aspect of it. Cheers
     
  6. TML

    TML Well-Known Member

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    Terry or Paul , could you please explain in layman's term what margin scheme is all about?
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Gst will be only payable on a margin of the property and not the whole selling price.
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    If its eligible for the margin scheme. If its a old IP knock down then its likely BUT it requires several factors including instructing your lawyer to draw up sale contract under the margin scheme. And I have seen that overlooked. ... I get asked "why bother ?"... This can often see the GST on the sale halve.
     
  9. Blacky

    Blacky Well-Known Member

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    I can see Terry and Paul have already responded. But they are not 'laymen' - so Ill give it a crack to the best of my understanding.

    In short GST does not (usually) apply to residential land - only the improvements.
    Therefore if you buy (or own) a property which is elligble then you can sell the subdivided property without having to charge GST on the land portion.

    As an example lets say you sell your development for $600,000. Of that the land component is worth $200,000.
    GST is not applied to $600,000 but rather $400,000 being the 'improved' value.
    Thus saving you about $19k in GST.
    This is a simplistic "laymans" calculation as an example only. Its a bit more complicated than that.

    As Paul alluded to - there are some steps, and hurdles and hoops to get through. So before buying (and definately before selling) make sure you speak to an accountant and solicitor to ensure that the land is elligable and you jump through the correct hoops.

    Blacky
     
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  10. TML

    TML Well-Known Member

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    thanks Blacky =) you are a gem.
     
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  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Sort of. GST applies to taxable supplies but the notion of GST is that the incremental supply is taxed so as value is added the GST applies to that.

    The margin scheme is intended to address the substantial value that exists in land when it is used in development which is then a taxable supply sold with GST in the price. Without the margin scheme a two tier price for land would occur. ie land that has GST in the price would be favoured over other land (since a credit could be claimed). It would discourage rebuilding on old land and discourage land acquired before the past 4 years. There are other examples in GST law where specific matters are taxed differently to the norm to address other anomalies. ie caravan park rents (5%), second hand goods, university text books and used cars etc.

    The calculation used by Blacky is a good example.

    The margin scheme cannot be used where the land was acquired under the margin scheme. I get asked a bit about that one. I like to use examples.

    1. You buy a old house currently in poor state but nonetheless a home. As its existing resi there is no GST and the seller wont likely be registered. This is eligible for the MS when sold since there was no GST paid on the land. Yet 1/11th of the purchase price is deemed to be GST in reducing the GST on the sale. What many sellers dont consider is that this reduces the GST payable on the sale often by 30-50% AND it also leaves the cost of the land as its original cost for income tax. Normally when GST is claimed the deduction is reduced by the GST claimed. Not when the MS is used.

    2. You buy a lot from a developer in a new greenfields land release. This sort of land is often sold under the margin scheme (check contract) so you cannot use the MS when you later sell. Why ?? Because there has already been a GST credit of sorts given when the developer reduced their GST payable by 1/11th of the cost of the land and it can only occur once. And the actual GST involved in the land purchase is unknown.