Construction - Joint venture

Hi all,

I am seeking some advice regarding a JV my wife and I are planning to do.

We own a PPOR (paid $581k) and have approached a builder, who is currently building two houses around the corner on a similar block of land (they are nearly finished and on the market for $1mil each).
We would be giving/selling (cheaply to avoid CGT) half of our land to the builder who has verbally agreed to build us a house to the same spec as the houses around the corner. The builder will carry all costs of subdivision, approvals, drawings, town planning etc. Simply put, this would mean an equity increase by approx. $400k without having to fork out extra money, which almost sounds too good to be true.
We are waiting to start with this project until we've lived in the original house for a year, and we would be either renting out the newly built house or live in it afterwards. The builder is also considering living in the property for a year once it's built to avoid CGT, and then sell.

Is it best to sell half the land like we are planning to do or would you suggest structuring this differently? I guess, not being a builder myself the pitfalls could be agreeing terms for construction of a house (and for schedule of materials) but I should be able to find someone who can provide decent advice on that?

Thanks in advance!

 

what makes you think you can avoid CGT? main residence exemption won't apply

 

I would be seeking personal tax advice as there are a range of issues here. Legal issue with the apparent transfer of land to a builder (which would be transferred based on market value as OSR require a valuation). The tax liability (income tax and GST) for the builder selling could even be partly your liability if he is in an enterprise involving you. You may be jointly and severally liable as partners. ATO chase you for the $$$.

I would argue the ATO would consider your sale a sale of land. Not a input taxed supply of residential premises. They may hold you liable for GST on 1/11th of the value. The ATO tends to take an aggressive multiple tax driven approach when tax avoidance is evident. They arent obliged to only chase one party.

Read this for the CGT view : (Actually it says there isnt a CGT issue)
Legal Database

 

Please get professional legal and tax advice as this whole story sounds about a million alarm bells for me.

 

Thank you both. Sounds like I need a new accountant.
Would there be a way to structure this so we can minimise tax?

 

Something is not quite right there.

Based on the fact you said you're waiting to do this before you've owned your PPOR for a year I assume you have bought it in the past 6-12mths. So the value $581k is probably still accurate. So if you duplex it each block is around $300-350k and a builder is then to build a house on each - presumably to a value of around $350k and the end value is then $1m?

It doesn't really add up to me. I doubt that a builder is going to construct something more than the value of the half block of land so where is this profit to $1m value going to come from? There is like $300k of magical profit per side and I highly doubt that is possible. Either what he proposes is less than what he is constructing locally or the end values are probably not accurate - or both.

This would only make sense if you've owned the block for ages and it's now worth maybe $450k a side

 

Yes there would be. How will depend on the circumstances.

 

From my reckoning, there is a PPOR already on the premises, and they would be subdividing off a portion to have a new TH built.

 

It was a little vague. When he mentioned the building living in it as an option too it sounded like demolish and build 2 with one getting one each.

 

I agree, especially when talking about the builder living in one to avoid CGT also.

 

Apologies, here are some more details:
We bought it in April 2019. It was a deceased estate and is valued at $730K, so we did manage to get it well below market value.
Comparable land sales in the areas are around $350k per block once subdivided. Builder has agreed to build up to spec worth $400k.
Comparable double storey house sales are 900k-1mil for the area.
We are living in the existing dwelling, which would be demolished.

 

Maybe its just me not following, but how exactly are you profiting in this plan?

 

The finished product will be 900-1mil per house. I will own one house, the builder will own the other. Given that I paid 581k for the old house and land, the difference will be 300-400k.

 

You sell the land below market and get a build free in return? For tax purposes wouldnt that be part of the consideration?

The numbers make no sense. Say the builder buys half the land at 300k. Costs them 300k to build there own and another 300k to build yours. There profit disappears because they are letting you keep the profit on your one.

They could have bought the whole thing for say 800k, build for 600k and get 1.8 value.

Your 300k profit comes out of the builder. Assuming a 20% profit margin, you get it all. Why wouldnt the builder just buy a whole block off someone else?

 

If the builder buys the land for $1 it seems to make sense.
I guess you'll be up for some sort of council tax on the land.

 

If it wasn’t for CGT or GST, the numbers would make perfect sense for both the builder and myself.
He receives a block of land worth 400k, so his cost would only be the build of both dwellings which wouldn’t cost him much more than 270k per dwelling as a small owner-builder. That means his outlay would be 540k plus all subdivision costs and approvals involved.
With an end value of 900k minimum, that would be a good deal for both parties. Again, that’s not considering tax implications for which I will be getting some proper advice.

 

If it wasn't for GST or CGT we could all make money

 

Right, CGT and GST are the only things holding 95% of the population back of making money.

 

There's ahellvalot more things other than CGT and GST that holds people back from making money.

 

This has more hairs than a yeti. Advice definitely needed.