developer and investor at same time?

just want to ask, for example, you build a set of units for rent and are under a trust...and build another set of units under a different trust this time to sell immediately.

i know that you will be classed a a developer when you sell immediately (intent to sell) ...the question is once you are classed as a developer, are all your property considered non capital and instead become stock? OR can you be both a developer and investor still.

 

I'm guessing you are regarded as both a developer and investor depending on the investment*.

*I'm probably wrong :/

 

1. The two trusts are treated as different entities for tax purposes so the activities of one trust does not affect the other.

2. One taxpayer can hold some properties on capital account and others on revenue account. So it's not all capital or all revenue.

2. Just because a property is not held on capital account (and therefore is not subject to CGT) does not mean it is trading stock. It can be on revenue account without being trading stock.

 

The ATO have explored this issue and there is a concern that an asset cannot be both revenue and capital account. However time can deplete this concern where the capital account asset is continually occupied as a main residence by the owner and intended to be excluded from the business. And many accountants will tell you about the three month rule as if it allows an asset occupied for 3 months to become a CGT asset so that the MRE can be accessed. Not quite correct.

The CGT exemption may not apply where the profit making intention prevails. A item cannot be CGT exempt if the proceeds are never CGT proceeds. TD 92/135 can apply.

Its referred to in my development kit and guide. Page 17. Its a complex area and a private ruling and/or structuring may be required. Message = Dont assume CGT applies.

 

In its simplest form...Perhaps. Being a developer is less the intention...Intention to profit is a separate test. Intention to hold may well be a capital asset intention or just a deferral. Using the proceeds from Trust A (revenue) to develop Trust B (capital) could be a nail in the coffin too as B relies on revenue from A. ATO could argue avoidance for tax and Part IVA and deny CGT basis etc reassessment later could even happen if the "holds" become solds. Key issue is hold means hold.

 

Are there things we can do then to prove holds are holds? Some ideas please.

Would have thought intent is mostly in the head /implied and not really recorded down on paper?

 

You are correct that intention is in your head but at the end of the day it is up to you to prove your intention. The ATO doesn't have to disprove it. You want to show your intention for purchasing the land and building was to derive income from rent (as opposed to deriving income from profit on sale).

If you end up actually holding and renting it out long term then this, by itself, would generally be sufficient to prove your intention. If this doesn't happen (e.g. you have to sell shortly after building was completed for some reason) you will have a tougher time of proving your intention. Having contemporanous documentary evidence of your intention will be key (e.g. early communication with property managers).

 

as Daniel said above, every little bit that supports your claim of an intention to rent will help. it could be emails with PM, emails with your development funder stating this, maybe you had discussions with your architect or interior designer about choosing more robust materials to withstand being tenanted instead of the usual, that kind of thing.

ultimately you never want the ato to think you're taking the p#ss because some people really do and that's when ato usually and often rightly gets its back up

 

According to my advice, yes you can be both but as Paul says they need to be kept quite separate and not taint each other.

Ways to establish intent
- when doing concept/design get a rental appraisal from PM - I also ask them is there anything they would change to make it better
- is proposed rental income used for serviceability for loan (goes to intent to rent)
- have a meeting with accountant about renting and depreciation of this asset and have an email record of meeting
- DON'T claim GST on the build

 

Can you claim GST, then latter change your mind hold for 5 years, make a GST adjustment to pay back the GST, hold another 5 years, sell properties, claim the CGT discount?

Basically does enough time passing make it a hold play?

 

What GST discount?

 

No. That would likely attract penalties and interest.
If GST is involved you can forget CGT being a issue.

 

Also take care with DA and bank loan docs. Many lenders will seek a different approach to dev finance (eg looking at it as commercial lend and approve your project plan etc) and you can self incriminate and ATO are happy to throw the evidence on the table.

 

Gosh I wouldn't. If you are unsure if you are selling within the first 5yrs it's best to not claim it and then if your situation changes and you need to sell, then claim it and use the margin scheme (if applicable) to sort out the debits and credits of GST.

 

CGT not GST.

 

Unlikely. The input tax credits cannot be claimed after 4 years -- From the date they are incurred. A catch many overlook. This can mean that the supposed 5 years is 3.5+

 

CGT is only triggered on the sale - so there is no going back.

 

so if i have emails to say , carpet company asking for hard wearing carpet because i plan to hold 5 years...... or choosing a lender with much higher fees because they offer no presale requirement, these can be use a substantial proof?

@Paul@PFI does commecial loan automatically rule out CGT discount...or can i use evidence above to counter it?

 

Plan to hold for 5 years to take the profits is the concern. Where did 5 years come into it ? You are confusing a GST rule that concerns definition of "new residential" with income concepts. There is no 5 year test for income. If that was how it worked, Harry Trigguboff would halve his tax bill and just take capital profits.

TD 92/135 doesnt care if its five years. The main residence exemption doesnt even apply as the build was undertaken for profit. So if its not a CGT asset it cant be exempt. Or get a discounted gain !! In one recent case holding 14 years failed for CGT and the change in value was taken on appeal to be ordinary income and Tribunal found for ATO. Interesting element was they didn't even lift a shovel or build a thing. It was just initially planned when acquired for knock down and rebuild and they never got to it. The old house was just rented out.

I know the ATO are looking at this issue as an area for revenue loss.

 

to clarify, for my case , 5 years is not a definite number/final plan to profit. It's more of a marker when it would possibly be safer to sell IF i need to (i.e. easier to prove intent was for income as i have seen in some other posts)