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CGT question...

Discussion in 'Accounting & Tax' started by SirDingo, 9th May, 2016.

  1. SirDingo

    SirDingo Well-Known Member

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    Hypothetical situation:

    Fred renos and flips houses for a living. Over the course of the financial year, he works very hard, buys a number of houses, renos them and sells them all.

    Fred sells each house for a modest profit. At the end of the year Fred has made $200,000 profit on paper, however, in reality the buying, holding, renovation and selling costs were $100,000 meaning he has $100,000 remaining after expenses.

    Can he deduct all buying, holding, renovation and selling costs to ascertain a total taxable income amount of $100k for the financial year, or are there other considerations?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    CGT won't apply to this situation, but income tax will.
    Buying and selling costs would be deductible.
     
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  3. SirDingo

    SirDingo Well-Known Member

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    Renovation costs and holding costs deductible too?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    yes
     
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  5. bdydrp

    bdydrp Active Member

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    @Terry_w Could you please explain why CGT wont apply in this situation?
     
  6. Scott No Mates

    Scott No Mates Well-Known Member

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    Fred is running a business.
     
  7. D.T.

    D.T. Adelaide Property Manager Business Member

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    After a certain quantity, the ATO sees your properties as trading stock rather than capital items.
     
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  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Quantity doesnt determine trading stock. A profit making intention is the requirement. The first time for a single house is sufficient.

    One strategy available to SOME who build / develop is to trigger a CGT gain when the land becomes trading stock. (There is a CGT event when land becomes trading stock - The taxpayer can choose cost or market value)

    That way the land profit (based on unimproved market value at date land is first held as stock) can be realised on capital account and the dev profit as ordinary income. There is a catch - Cashflow and timing.

    Its something to consider and to evaluate.
     
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  9. dan c

    dan c Member

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    To answer your question, the type of transactions you describe would most likely be seen as renovating and selling for profit, and therefore on revenue account. The sales are not 'mere realisations' of assets.
    Buying costs would form part of the purchase price of the trading stock, and holding costs (rates etc) would also be tax deductible, as expenses incurred in gaining or producing assessable income.
     
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