CGT liability for Unit Development

Hi everyone,

Currently looking into developing one of our investment properties, and looking for some help around what the best way is to structure everything, to minimise tax.

Background:
Property purchased in 2013. The property has been rented from day 1, and continues to be rented out. The land value for the block has significantly gone up in this time.
Our intention is to build 3 units on the block in 2017 and either sell all 3, or retain 1 and sell 2.

It is currently owned by 3 individuals:
- A: 80% (does not have a main residence)
- B: 10% (has a main residence)
- C: 10% (has a main residence)

Scenario 1:
- Keep ownership as is.
- Build 3 units and sell.

How much tax is payable?
· Income Tax Rate x (Total Sale Price – Land MV 2013 – Build Cost)
OR
· Capital Gain at Income Tax Rate x 50% discount x (Land MV 2017 – Land MV 2013) +
Income Tax Rate x (Total Sale Price – Land MV 2017 - Build Cost)

Scenario 2:
- Form a trust and sell entire property to trustee company before building

Tax Payable on sale to trust:
· Capital Gain at Income Tax Rate x 50% discount x (Land MV 2017 – Land MV 2013)
(Trustee would incur stamp duty on purchase)

Tax Payable on build, when build profits are distributed to individuals, through trust:
· Income Tax Rate x (Total Sale Price – Land MV 2017 – Build Cost)

Scenario 3:
- Keep ownership as is.
- After construction Unit 1 is retained solely by ‘A’, and is used as their main residence for 6-9 months, and re-rented before selling. (Would be sold within 5-6 years if re-rented and ‘A’ would not hold another property as main residence).
- Unit 2 and 3 are sold (‘A’: 47%, ‘B’: 15%, ‘C’: 15%. The initial ownership remains the same, with the proportion of ‘B’ and ‘C’ ‘s interests being higher as ‘A’ has solely taken ownership of unit 1). Tax Payable on sale of unit 2 and 3:
- Same as scenario 1 except only 2/3?

Tax payable by ‘A’ on sale of unit 1 after use as main residence:
- Capital Gain at Income Tax Rate x 50% discount x (Land MV 2017 – Land MV 2013) +
No Tax on (Total Sale Price – Land MV 2017 – Build Cost)

Key Questions:
- Will the CGT discount be available on the land for the period from the start of ownership up until the start of the build?
- Will ‘A’ be able to take advantage of the main residence exemption if he lives in one of the new units for a few months, and then rents it for another few years?

I also know we have to pay 10% GST on the sale of new homes. But I’ve excluded that for the purpose of the above scenarios, and focused more around income tax.

Any help around this, and any other suggestions around structuring would also be much appreciated.

Thanks in advance!

 

Cgt doesnt usually apply to developments so get some good tax advice.

 

Thanks Terry. I'll hopefully be speaking to someone shortly.
I was hoping to clarify whether we are still able to claim a 50% discount on the growth of the land during the 4 years it will be rented before the build (capital stock). And using the 2017 market value as the cost base for the land, for calculating the profit on the sale of the units (treating it as trading stock from when it is built)?

 

Yes it may be a deemed disposal - going from capital account to revenue. This may trigger paying CGT now even without a transfer, but it may work out cheaper in the long rung.

 

The CGT event route can be a bit complex. Its not always available. However if it is, there is then a cashflow timing issue as the CGT event for trading stock is triggered when "first held" and then there can be a year or so before realisation and sale of the completed units occur.

One further factor to calculate into plans is use of the margin scheme and the potential savinsg this may offer. A further factor is a scrapping deduction.

 

Thank you both for your feedback!

Cashflow isn't too much of an issue at this stage. If it means paying CGT upfront, to crystalise the capital gain, I'd much rather do that. What is involved in seeing if this route is available to realise the capital gain upfront?

In terms of "first held" as trading stock, I guess that may be hard to define. I'm not sure if this can be seen as the point where the property is empty and definite plans have been made to develop, or an earlier point being when plans have been approved?

The scrapping deduction is definitely something to explore.

 

Have a read of the relevant legislation first:

s 70-30 ITAA97
INCOME TAX ASSESSMENT ACT 1997 - SECT 70.30 Starting to hold as trading stock an item you already own

 

You might even be able to borrow to pay the tax because as a 'developer' you would be considered in business so the interest could be deductible.

Seek tax advice.

 

+1 "Seek Tax Advice"

 

Thank you both for your help!
I'll definitely be getting some specific tax advice.
This will help in giving me some background when seeing them.