GST , Tax & CGT on a Knockdown rebuild

Hi Everyone,

I know this has been answered a few times but wanted some thoughts
Situation- Location: NSW
We currently have a Family Trust & Pty ltd company that we use for Renovating & Sell Strategy.
We are looking to Joint Venture with another couple for the purpose of borrowing power

Knock down rebuild Situation
Total Cost Estimated 2.4 Million (Existing house buy, Stamp duty, Holding Costs, Build Cost, Selling Cost Everything !!! but any TAX) Total Hold Time estimated 18 Months - Expected sale Price 2.7Million Projected Profit 300k

Senario 1- Purchase in all 4 of our personal names, Listed as an Investment, We would be eligible for 50% CGT discount only being tax on Marginal Income tax rate on 150K (Maximum Tax payable @ 45cents in every dollar = $67,500. ) would be much less as income individually isn't over 180k for each of us. (land Tax say 1.2Mil - 482,000 Threshold payable on 718,000= $11,488 in land tax payable.
Would GST be payable on total profit or total sale?

Senario 2- Use of unit Trust and profits distributed to Companies post sale tax on total profit (300k @ 28.5c in the dollar = $85.5k
(Land tax payable on full amount no threshold 1,200 000 @ 1.6% = 19,200)
GST Payable same as Scenario 1.

Thoughts on each ? Pros & Cons?
Thank you !

 

Don't assume you will get the 50℅ cgt discount.

 

Btw a land tax threshold could be achieved with a fixed unit trust where the unit holder is a company

 

Would it possibly not be eligible?

 

If you are carrying on an enterprise and your sales exceed 75k you are liable for GST.

It does not matter if you are a person, trust, company, partnership or super fund.

If their is an enterprise and the turnover exceeds 75k (charities are different) the GST obligation is present.

You (the entity that chooses to develop) might be able to access the margin scheme.

 

Yes

 

The asset is held more than 12 months why would it ?
Sorry if my question is really obvious

 

It sounds like it might be an isolated transaction to make a profit on the project and not from rent. So it may not be capital account but revenue account.

See specific tax advise on this as very complex.

 

Thank you everyone!

 

Information on the tax implications of developing is described in the developer toolkit. It covers why there is no CGT and its ordinary income and why GST is involved and the strategies to reduce GST (eg margin scheme) which can increase profit by a significant factor. That said GST will affect profit as indicated below....

My rough calcs are that the OP example would produce a profit of perhaps $200K not $300k and involve GST payable of at least $136K GST may be reduced by claiming the GST on the build costs. The land tax cost over two years (if timing is delayed) is a substantial cost - Is it included in the estimated cost ?

There are substantial liabilities that could be encountered with a JV as described. eg a failing business etc. Legal advice on structure and risks should be explored.

 

history of previous development activity. even if not profit from an isolated transaction. sounds like revenue account to me and no 50% cgt discount.

 

Yes Mike that distinction seems so obvious to some of us but for the average PC member the issue of whether its a business (recurring nature) or its a one-off isolated profit making transaction BOTH are taxed in the same manner (more or less) and are on revenue account.

One of the key distinctions that ensures a sale remains on capital account is a mere realisation of a CGT asset. ie a IP sale. Activities that change the land use etc may or may not be a concern too. eg lodging plans with council for a DA. But a more systematic approach that seems like its intended to be a enterprise (ie development site, plans to subdivide, build etc) is generally required which demonstrates a possible intent to produce profit from the land and changing its use. In some instances what appears a CGT disposal may also be a revenue problem. In these instances good tax advice from a property savvy tax adviser is recommended rather than assuming. One of the more serious common concerns is deciding to knock down a old house on the land - The clearing of the land can have all sorts of consequences and tax effects. The major one may be GST. The importance of tax planning each situation is critical.

I have recently been engaged by a large group of owners in a Sydney suburb who have sold to a developer. A number of them spoke to accountants who suggested a possible tax concern that meant a isolated profit making transaction. The group all had unfoundered fears that taxes would be significant. Shows why savvy property tax advice is important. I confirmed that this isnt the case and that all are selling their owner occupied homes and that the sales are all mere realisations - Yes at a far higher price but still a CGT event and that means it is also likely to be exempt from tax using the main residence exemption. The owners havent sought to operate a joint venture or seek DAs and plans for the site. These are all things the developer will do.

 

I advised a forum member recently.
He was going to buy a property to live in, knock down the house and then sell the land.
I had to tell him no main residence exemption (he had a history)
Not CGT but income tax
And GST on the land sale

 

Thank you everyone for your thoughts,
I think we are going to opted for a Unit Trust
Seems to be the cleanest and easiest way

 

Considered 2 separate entities as tenants in common?

 

We have not factored in 2 years, We should only required a CDC, Auction is in a week & Most Builders Spoken to are saying 15months Completion, Yes it is a risk but I am comfortable.
After speaking with our Accountant we should be able to bring GST payable down.

 

Benefits over Unit Trust ?

 

for starters you can each have separate entities withou the involvement of the others.

More clear cut tax treatment. Unit trusts and tax is very complex.

 

Huge array of factors need to be considered and why good experienced advice is a must.

Stamp duty can also be a issue for unit trusts. In QLD a unit trust may be a dangerous choice for property as any change of unitholder can trigger duty and a later change to a less experienced adviser or someone acting without knowledge of the issue can be problem. Involving a SMSF as a unitholder means trust income must be physically paid - Cant just reinvest it as additional units as this triggers duty. No minimum duty triggers exist in QLD.

 

When you scope your instructions to your advisor specifically request that the advice considers all taxes and all structuring options. Do not limit the advice to income tax.

A great advisor will take this as standard. Other blokes will go white with fear.