Deed of Partition and CGT

Discussion in 'Legal Issues' started by PRD_85, 3rd Aug, 2019.

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  1. PRD_85

    PRD_85 Well-Known Member

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    Okay, makes sense.

    This seems to be, by far, the best possible scenario, as the only tax payable would be stamp duty on original purchase of land.

    Have you assisted in implementing such a structure in reality? Are there any negatives of the structure?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This above my pay grade, I provide a broad overview and you will need someone more specialised to implement it.
     
  3. PRD_85

    PRD_85 Well-Known Member

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    Yep that’s correct.

    So the capital gain on which tax is calculated is as follows:

    Market value of current interest ($1.5m each) - cost base of acquisition and construction ($750k each + $500k each), which gives:

    $1.5m (market value of current interest) - $1.25m (total cost base each) = $250k

    Is this correct?

    Also, I’ve saved Vince’s details from HWL and I’ll shoot him an email on Monday mentioning your name.
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Where a development structure like this can fail miserably is when A and B or even just one of them later sell within a short term (or even a year or two) and attempt to later argue there was no enterprise. ATO wants its 1/11th GST and its cut of taxes. Claims avoidance. The apparent private use may be a mask.

    The skills, knowledge of the parties may be a issue to consider. The relationship of A & B could be a factor. All of the circumstances need review.

    eg Example 4 in the recent ATO draft paper could be a example of this concern. Example 11 is another that considers what a taxpayer may claim as a main residence which is a isolated profit making intention due to different intentions.
     
  5. PRD_85

    PRD_85 Well-Known Member

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    Thanks for the reply. I had a look at the aforementioned ATO example.

    I fully understand that when there is seemingly more complexity than there needs to be (from the ATO's perspective), eyebrows are raised. In this case, however, the houses are bona fide being built for the purpose of being our PPR's in the long term. This is to the exclusion of any other intention.
     
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  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Then it should not pose a concern. However lets fast forward to 6 months after completion and both properties get sold. Listed by same agent who also says he had discussions a year earlier. I would always qualify anyone who says their primary intention is not to profit that they should ensure the property clearly is held as a CGT asset and used as a main residence for a reasonable period to avoid concerns. I dont mean the three months minimum requirements under the main residence exemption. But one of the sellers may have a purpose for selling soon eg lost job, move interstate, divorce etc.
     
  7. PRD_85

    PRD_85 Well-Known Member

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    All of the above is understood.

    Thank you.
     
  8. PRD_85

    PRD_85 Well-Known Member

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    @Terry_w

    In the event that 2 people subdivide a title very shortly after acquiring the underlying land, could this avoid the need to enter a Deed of Partition THROUGH a Trust?

    That is, given there would be no "gain" in the short of period of time, wouldn't there be no need for a trust setup, and only the Deed of Partition?
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Stamp duty ? Its a major reason for a partition.
     
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  10. PRD_85

    PRD_85 Well-Known Member

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    Yep, the Deed of Partition mitigates the stamp duty.

    Doing it through a bare trust is meant to also mitigate the CGT, but if we subdivide before constructing, there won't be CGT anyway. It will just save money on the set-up of the Unit Trust, as they are quite expensive to do...
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What unit trust?
     
  12. PRD_85

    PRD_85 Well-Known Member

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    To avoid both stamps AND CGT on subdivision, the deed of partition has to be under a unit trust in initial acquisition of the property
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This is unusual. Have you a lawyer advising?
     
  14. PRD_85

    PRD_85 Well-Known Member

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    Why do you say it’s unusual?

    Yes - I have a lawyer advising but only preliminary at this stage. Still awaiting formal financial and structuring advice
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It is usually a bare trust with each owner owing as trustee for the other as tenants in common
     
  16. PRD_85

    PRD_85 Well-Known Member

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    Yep - I think this is how it will be structured (bare, rather than unit trust).

    We are essentially awaiting formal, financial advice UPON which the lawyer will prepare the documentation. Unfortunately not many lawyers are qualified financial advisors, so they both have to be outsourced seperate to each other.

    Nonetheless, the first step is for the financial advisor to provide the structural + tax advice. Following this, the lawyer will prepare the documentation in accordance with this advice.
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Why is financial advice needed?
     
  18. PRD_85

    PRD_85 Well-Known Member

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    Lawyer indicated that he can’t advise on what impact the structure will have on our tax position as he isn’t a qualified tax advisor...

    How do you suggest I approach it to minimise costs?
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    So you need tax advice in that case, not financial advice. You should probably have used a tax lawyer.
     
  20. PRD_85

    PRD_85 Well-Known Member

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    Yes, tax advice.

    Well I haven’t yet committed to anyone, so I’m still able to pivot towards a more cost effective outcome.

    Would a tax lawyer be allowed to provide advice on structuring? From my understanding, they would have to still work in conjunction with a qualified ‘financial’ advisor
     

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