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CGT on land resale

Discussion in 'Accounting & Tax' started by Nish, 12th Jul, 2016.

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  1. Nish

    Nish Well-Known Member

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    Hi All,

    I bought a land along with a friend in March. The land is due to settle in August. We had planned to sell it after settlement as soon as possible. It was a bad deal indeed but I was not much aware of the cons at that time.
    Could someone please suggest what would be the CGT if we sell it within 1 or 2 months of settlement. I tried online calculators but they dont show anything, get some message on cost base issue. Also, how does the CGT thing works if I reinvest the gain in property within 2 years. I have heard some changes around this rule.

    Thanks!!!
     
  2. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    the more important question to answer first is whether CGT applies or not. The sale may be on revenue account and no CGT discount as it isn't a capital gain.

    The question to be asked was the sale part of a 'profit-making scheme'. If so the profit is taxed under S 6-5 (technically also under the CGT net but anti-overlap provisions mean no double tax)

    FCT V Myer Emporium and TR 92/3 gives guidance as to when profits arising from 'isolated transactions' are considered to be on revenue account. The ruling states that a profit from an isolated transactions is generally on revenue account when

    1. the intention or purpose of the taxpayer in entering into the transaction was to make a profit and
    2. the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

    your intentions, activities undertaken, involvement, etc will help your accountant answer all these questions.

    NEVER ASSUME CGT APPLIES

    Have you also considered whether you need to pay GST as well ?
     
    Last edited: 12th Jul, 2016
  3. Nish

    Nish Well-Known Member

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    Thanks @MikeLivingTheDream for your reply.
    The purpose of land was to sell only after settlement. It is a normal purchase on my name alone and not two parties as my friend is a silent party to it.
    As this is my first (and probably last purchase :) ) of this type, I am not aware of GST and other taxation issues. That's why I raised this question about CGT.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sounds like you should get some proper advice.

    Will you be selling at a loss or a gain?
     
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  5. Nish

    Nish Well-Known Member

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    Thanks @Terry_w
    Should be on some gain
     
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Mike is quite correct but in the example the land would be sold promptly after settlement so whether its CGT or not 100% of the gain may be taxable. No CGT discount so the tax impact is same either way. Any loss may not be available ?

    I'm questioning if an enterprise can exist through a poorly devised concept plan ?
     
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  7. Nish

    Nish Well-Known Member

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    Thanks @Paul@PFI
    Even if it is fully taxable, is the tax 50% of CGT if sold within 1st year. I came across this somewhere online.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    no

    If CGT applies any gain can be reduced by 50% if the asset has been held more than 12 months.

    If CGT doesn't apply then no discount.

    In this situation it sounds like CGT may not apply - but you need specific advice about this.
     
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  9. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    In determining whether you acquired the CGT asset at least 12 months before the CGT event, you exclude both the day of acquisition and the day of the CGT event.
     
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  10. John Bone

    John Bone Well-Known Member

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    One important consideration is that if CGT does not apply then GST does and vice versa. If the profit is taxable as income then GST will apply but you will be able to claim the margin scheme if you purchased from an unregistered seller. If you purchased from a GST registered seller then you will be able to claim the margin scheme or the GST paid on the purchase as an input credit depending on whether the registered seller claimed the margin scheme or not.
    If you sell under the margin scheme then this MUST be specified in the contract of sale.

    In your case I would be almost certain that the profit on the transaction will be taxed as income and GST will apply simply because you do not buy vacant land for the purposes of generating an income (unless you planned to agist cattle or something equally weird). Therefore the purpose was to develop or sell at a profit and the land will be treated as stock, not an asset for the purposes of acquiring income.
     
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  11. Nish

    Nish Well-Known Member

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    Thanks @John Bone
    In that case probably, the CGT taxes won't be applicable. I believe it should decrease the taxes as I am not in a very high taxable income slab.
    But nevertheless, I would need to take specialist advise as mentioned earlier. But that would have to be as soon as we sell as I need to give the share to other partner so would need to know the deducted tax amount upfront.
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    You may create a bigger tax problem doing that. You cant deduct tax then give a partner their share. They could remain liable for tax and later be stung with an allegation of avoidance. You cant "gift" a share of profit....Get advice
     
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  13. Nish

    Nish Well-Known Member

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    Thanks @Paul@PFI
    Didnt know that. Would seek professional advise upfront now :)