CGT Question

I've had an investment property under a fixed unit trust for 13 years.

If I renovate it, add 2 bedrooms and add a granny flat to it, would this create GST liability and loss of CGT discount on the sale? (Assuming if it was sold immediately). If so, how long do I have to wait before selling?

Thanks.

 

If it sold as a residential property it is likely to be GST free as GST only applies to new residential premises OR substantially renovated...That would mean more than a few rooms. This scenario usually refers to gutting & full reno

The trust may have a discount CGT gain if the improvements are under the seperate CGT asset threshold which would create a second CGT asset which has no discount if promptly sold. Question is will the unitholders ?

The question needs to be considered - Does the property cease being residential premises and become trading stock at any point so that the efforts are an isolated income producing activity. This could sever CGT issues from profitmaking.

 

Thank you Paul. The total cost is just under 100k so it's under the threshold. I'm not sure how the unit holders would be treated?

Can you explain what makes something an "income producing activity"? Isn't the point of every investment to ultimately produce income (whether it's immediate or further down the track)?

 

Threshold ? A trust has no tax free threshold. I dont follow.....

My comment refers to the issue that a CGT issue can affect the trust AND also the unitholders if not done correctly.

The question about producing income is beyond general PC explanation and requires considering personal circumstances and determining if you have either a isolated profit making intent, a profit making intention in any event or a project plan that also has a profit making outcomes. Back in the 1990s before Keating introduced capital gains tax profit making was a tax concern...still is. Too many people think of property and disregard ordinary income provisions and just think CGT.

Its easy to stop using a resi property and commence a reno so it sells for a higher price. Question is - Is it a CGT profit or ordinary income ?

I am about to post a thread about a example that is the inverse.

 

I am not sure how much information someone will be able to provide but one of my relatives just got a letter from ATO indicating the CGT they may have to pay and the amount is nearly $90K.

It's young family and they sold theie property last year (bought in 2001(I think) and property was always rented out) to start the business.

Is it normal ??? Or there can be any mistake?

 

Yes possibly this could be a substantial renovation making it a 'new' property and therefore subject to GST if sold within 5 years of the renos.

 

Yes this would be normal. Why didn't they pay the tax?

 

Did they self-lodge their tax returns? They've held for 15-16 years so the property would have doubled or more in that period (maybe even rezoned too).



Consider a 2001 median price of $300k, would be at least $700k in 2016, a $400k gain.

 

Of course the issue of the trust units must also be considered. While the unit trust produces a CGT gain that is distributed as income to unitholders, the unitholders may redeem units and also incur a CGT gain or loss depending on the trust.

 

The ATO only issue those letters normally where returns were lodged without a CGT event OR arrears of lodgements have occurred. If the ATO are suggesting they may raise an amended assessment or a default assessment you need to act fast. They have some nasty powers available and can demand lodgement within 14 days or they can almost double the tax and this type of assessment cant be objected to.

The ATO data is fairly simple (and often close to accurate) and may overlook a number of issues which reduce the tax payable. Tax advice may be needed. The comment "to start the business" also needs advice....It could increase or reduce the tax payable.

 

its a fixed unit trust so you need an accountant who understands the CGT Event E4 issue and when to redeem or cancel the units issued otherwise you will have double tax.

 

could they take advantage of the small business CGT concessions ? sounds like they need solid advice. did they operate a small business from the property ?

did they consult someone before they sold the property ? they may be able to reduce the gain to zero if they operated a business through the property.

 

Why did they think it was exempt from CGT if always rented out?

 

My understanding is they sold it last year (2016) so it came under 2016-17 tax return and found out about it.

I velieve thay must have used an accountant (will ask). It was a townhouse ( 1 in the block of 6) and yes price might have been doubled not sure about rezoning but it was under $400K. Thanks for the graph though.

Thanks for highlighting how crucial it is and how bug the impact it can have.

No, they did not operate small business from the property. In regards with cosulting someone-I am not sure.

If I find any other info will post but thanks everyone for your contribution. I am sure they are aware that they need aolid and correct advise and I am sure I be mentioning few names from here.

 

Just wait for the penalty to be added to what they owe now.

 

Hi @Terry_w , I am not sure if they assumed or if they didn't pay correct. They just got the notice and enviroment was bit tense so I didn't ask many questions yesterday but will check with them.

Ps:i meant to write Believe in my previous msg

 

Do you mean $90K +penalty ???

 

This is my assumption because bought the business I think in 2015 and sold the property in 2016. (Details are sketchy )

 

I have no idea of the amounts involved, but if they have not reported income there will likely be a penalty on top. How much will depend on how reckless they were - could be up to 90% of the tax owed potentially.

 

The accountant doesn't sign the tax return, the payer does. If the Accountant left out the info that's a mistake, if they didn't declare it, then that's another matter altogether