CGT Relating to Subdivision

Hello,

Hope if any tax professionals can provide some advice or direct me to a reliable accounting firm (preferably in Sydney) that may be able to help.

Ok here is my scenario:

Joint venture Partnership

Owner of 1 Smith Street (which is his Principle Place of Residence, purchased in 1999), allows me, (under a company name) to submit a development application on the property owners behalf.

My company would take on all the risk by paying for all development costs (total of $100k) associated with obtaining DA approval.

The DA approval allows an uplift by building a duplex with Torrens Title subdivision.

It is agreed between the Owner of 1 Smith Street and I that the property will be sold as a DA approved site marketed to builders who will then build and either sell or hold.

The following breakdown shoes the net profit (before tax) after the sale of the property at time of settlement.

DA Approved site Sold
$2,200,000

(Less)
Market value of property at time of JV
$1,800,000

Total Development Costs
$100,000

Profit/Loss
$300,000

For taking on the development, I will be remunerated at time of settlement via profit share split. In this case 50% to myself and 50% to the property owner of 1 Smith Street.

Profit Split

Property Owner @ 50%

$150,000

me @ 50%

$150,000


The questions I have include:

1. How will the property owner be tax, if at all in this scenario? Because the property is his PPR, is the Capital Tax Exemption still apply?
   
   
2. How will I be taxed, taking into account that this is going to be an ongoing business?
   
   
3. Is there be any other recommendations you would suggest to minimise tax for the property owner, most importantly CGT?
   
   
4. If the property owner is liable for CGT will the property owner be able to deduct my fees as part of the cost base, seeing that I'll be paying for all the DA and subdivision fees?

Any advice would be greatly appreciated.

Thanks
Kip L.

 

I'm not an accountant BUT

Whilst you say JV and profit share split I would assume basically what the deal is at it's simplest is the owner owns the land and is paying your company for the DA costs and 50% of profit via an invoice that is paid at settlement.

1. potentially the owner by applying for a DA and selling it as a DA approved block might risk his CGT free asset.

2. your company will be taxed the money at company tax rates.

3. if the owner is subject to CGT I would assume he can claim the costs of your DA costs but I'm not certain about the profit sharing invoice

All in all I think this is huge risks for the owner.

 

CGT exemption should still apply to the owner (assuming all other criterias are met)
and your company will taxed on $250,000 minus expenses your company incurred (you mention $100,000)

 

Is it a JV or a partnership?
What about stamp duty?

 

Merely obtaining a DA wont put an asset at risk of moving from being a CGT asset to either trading stock or a revenue asset.

 

Thanks for your thoughts on this Mike.
I thought I had recalled somewhere that it could be used to show intent to develop and therefore not a CGT asset?

To me it sounds like neither?
Reading betweens the line he will have no ownership or interest on the site but a business relationship where he will pay for the DA and invoice/claim that at settlement together with an invoice/claim for 50% of the value uplift.
To me that doesn't sound like anything but business services with a bonus for the business services.
Does sound a bit like, what was that company, renofunders?

 

@Westminster it depends on the involvement of the taxpayer. The main case for that type of activity was Stevenson v FCT.

Even though the farmland was acquired a long time ago the subdivision activities were found to be from a profit making scheme. The fact he went to subdivision stage after the DA is one issue distinguishing it from purely obtaining a DA. in that case although he didnt construct any buildings he did do some major sewerage and road works.

so if purely apply for DA. DA approved and sell then I think based on Stevenson you would argue no significant activities done so the asset remains a capital asset.

 

You will need to look at definition of 'dutiable property' and the terms of the agreement and see if anything is assigned. Plenty of people have been caught out with so called JVs. - I am talking about stamp duty here.

 

Thanks for the feedback, greatly appreciated.

Just confirms I really need to find an accountant who specialists in this field.

 

And a lawyer.

 

GST has been excluded from the above. Rework using margin scheme, claiming GST on all build costs and profit will be lower.

1. Perhaps. Mikes views seem sound. Depends on nature of what owner does and documentation. If they share in profit it could be a seen as a partnership and enterprise.
2. Isolated profit making or recurring business income. There is no CGT in the world of development
3. Sell their property for its highest and best use eg as a dev site and do as little as possible for that to occur
4. They cant pay any costs if you pay them ! In any event if its a CGT exempt sale by owner then it wont factor into any calcs.