Deed of Partition and CGT

Hi all,

Can someone please clarify whether CGT will be paid in the following instance:

- 2 people (A and B) buy a permit-approved parcel of land, with a deed of partition in place

- A and B then construct the 2 townhouses

- A and B then subdivide the 2 lots so A and can own 1 title outright and B can own 1 title outright (rather than both owning 50/50 of each)

- A and B will be living in the 2 townhouses as their main residences upon titles being transferred to their individual names

Kind regards,
Paul

@Terry_w would be good to get your thoughts

 

this exact scenario was just discussed in the accounting thread

Partition CGT date

short answer is yes tax will be payable. Probably in your case CGT

When a block of land is purchased by joint owners, the owners each have an equal interest in the whole block of land. They do not own distinct parts of that land.

As such, when the block of land is subdivided the owners have equal shares in each block of subdivided land.

However, when a transaction occurs that results in each person owning a distinct and separate block of land, each owner is taken to have disposed of their interest in any subdivided block which is now owned by another. Similarly, the owner is taken to have acquired the other owner's interest in the block of land that they now own exclusively (Taxation Determination TD 92/148).

 

I saw that thread before posting, but couldn’t work out what the answer was...

Is it the case that if there is a bare trust in place from the outset, CGT can be avoided?

In the case that CGT had to be paid, how would it be calculated? On land value only?

 

CGT would be calculated on the market value of the interest being transferred at the time of the CGT event.

 

Could this CGT be avoided through a deed of partition? There seems to be conflicting commentary throughout the threads I’ve seen relating to this topic. Some say it can be avoided through a bare trust at time of acquisition and others saying it cannot.

 

Sorry for the multiple replies, but just for my own understanding, I’d appreciate if the following scenario could be answered:

1. A and B buy land for $1,500,000
2. Upon construction completion and subdivision, each townhouse is valued at $1,500,000

Does this mean that the ‘market value’ of each person’s 50% interest is $750,000 (in each townhouse)? Further, given the underlying land was purchased for $1.5M as JT/TiC, doesn’t this mean that no CGT is payable?

 

the cost base of each person's 50% interest in the land would be $750k. the market value of that 50% interest would now be $1.5m. that excludes any construction and subdivision costs. so using basic numbers they have a $750k capital gain (excluding their share of construction and development costs).

 

Okay this makes more sense. However, assuming construction for each townhouse is $500,000, doesn’t the capital gain become $250k, rather than $750k? Don’t we have to deduct the construction cost?

 

as i said "excluding any construction and development costs). if they incurred $500k in development costs for each townhouse then the cost base would be $1.25m. so yes a $250k capital gain.

 

Understood - thanks Mike.

Views on the bare trust comment from earlier?

 

a complex legal question.

 

Understood.

Have you dealt with a real-life example like this before?

The reason I ask is because I see you’re from Melbourne (like me), and given I’ll be seeking formal, written advice on this scenario (as it applies to me directly) in the next few weeks once we obtain permit approval, it may be worthwhile getting in touch privately.

Cheers

 

yes i have if wanting advice on the bare trust we refer our developer clients to HWL Ebsworth as each situation is different. I can give you the contact I deal with on almost a daily basis and they can provide a fee estimate.

 

If partitioned at purchase I would say no if done correctly as there would be no change in beneficial ownership. Each party would hold one portion of the land but title would be in both names.

 

Legal Tip 77: Joint Purchasers of Land and deeds of partition

 

Can you clarify what you mean by title in both names? Isn’t the whole point of partitioning to seperate the title ownership

 

Okay great - I know HWL well. Are you able to provide me with your best contact number / email so I can provide you with a rundown of the situation in more depth to which a few estimate can be provided? That would be great!

Also, in relation to the hypothetical example previously, why is it that the full $500k gets added to each person’s cost base rather than just $250k (50%)? Is this because each person is taken to be personally paying $750k as a 50% labs interest but the FULL construction cost?

 

AB have joint ownership in relevant portions. Partitioned from the beginning so that A holds part of the land as bare trustee for B and vice versa.
Subdivision
A owns Lot 1
B owns Lot 2
No stamp duty, no CGT event and no GST potentially.

 

you said each townhouse cost $500k to build so a total construction cost of $1m ?

 

Vincent Licciardi
Senior Associate

HWLE

Level 26, 530 Collins Street | Melbourne VIC 3000
Phone +61 3 8644 3522 Fax 1300 365 323 (Australia) | Fax +61 3 9101 7985 (International)
[email protected] | www.hwlebsworth.com.au


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