How is CGT calculated on this one?

Hi guys,

Doing a couple subdivisions at the moment and trying to get my head around how CGT works. It seems fairly easy for straightforward transactions (sale price less costs, and 50% discount if you’ve kept for 12 months). However my issue is I’m subdividing properties and selling one half, so how is the ‘profit’ calculated? See below example:

House on 1200sqm, corner block.
$380k purchase price
$14k stamp duty + legals

I am going to subdivide off the excess land ($70k subdivision costs + assume $20k works to clear the site). So total cost let's say $484k and I've got a house worth $300k and a block worth $240k.

I have 2 options:
1) Sell the new block of land. Assume $235k net sale price. Retain the existing house (worth say $300k)
2) Build a house on the new block of land, and sell the existing house for $300k.

Questions:

1) What is my ‘capital gain’ if I go with Option 1? Obviously I’m making a profit off the newly created lot, but the existing house I’ve paid $380k for is now worth $300k.
2) What is my ‘capital gain’ if I go with Option 2? I paid $380k for the house and selling for $300k. Surely they won’t see this as a ‘capital loss’ though?
3) To get the 50% discount I believe you have to hold for 12 months (from exchange to exchange) and the intention must NOT have been to make a profit. Is it hard to prove the intention is not to make a profit when you’re doing 2 or 3 subdivisions a year, keeping for 12 months then selling and making a profit?

Any help is appreciated. Unfortunately my accountant is unavailable to meet for a couple weeks and I'm trying to figure out whether I should be doing these subdivisions straight away or waiting 12 months!

Cheers

 

Sounds like it may not be cgt but income tax. You appear to be conducting an enterprise with multiple projects and short turn around times. How long have you held each?

You would need to apportion the costs between the two parcels to work out the cost based for cgt or for income tax purposes

 

If you are a developer then the 12 month bit is irrelevant to you.

Get advice. Ask to deal with senior staff in your accountants office who can help.

If you end up chasing the 50% CGT discount make sure you have a lot of evidence to prove your intention.

 

100% with the prior posts.

I have attached my developer toolkit which explains all the broad tax issues that you should already understand. It is a good read prior to getting personal tax advice as it helps guide you on all the things that will be discussed. If you dont plan the tax as part of the dev the you will over or underpay tax (probably both I suspect when GST is considered) and these mistakes are what can lead to penalties.

Waiting 12 months wont change a thing.

What I read in the post
1. GST applies to either the land sale or the house sale idea.
2. Margin scheme may be used to reduce the GST as will claiming GST on some costs
3. You need a valuation to determine the "cost"of the land being sold
4. Profit is based on values after GST is excluded
5. What are you doing with the existing other lot of land ? It may not be a CGT asset !!

 

I have held one for over 12 months, only had the idea now to subdivide it. Never bought it for that. The other one I am buying now, and considering subdividing either now or down the track.

I'm lost as to how to apportion the costs. Essentially the existing house block is losing value ($380k now, $300k after subdivision) and the new block is gaining value.

Thanks Ross. My Accountant is moving offices so unfortunately I can't catch up with him for 2 weeks but looks like I will have to wait, in order to get more direction.

Thanks Paul. Only had a very quick look through developer toolkit after a 14 hour day but very helpful. Will read through properly.

I wasn't aware there would be GST applicable so will certainly seek advice on this... I've never had to deal with GST before personally so not looking forward to it!

Regarding point 5, not sure yet. I'm trying to figure out now what I'm doing with each of the lots once subdivided - ie which to keep, do I build on the new one, do I sell one or both etc.

Thanks everyone for your help so far!

 

You would need a valuer to apportion.

If you have held for 12 months it may be partially CGT and partially income tax and there may even be a deemed capital gain without change of ownership occuring.

 

The CGT event for property use changing from CGT to a income producing use (trading stock) assumes the taxpayer uses cost unless the taxpayer elects to use market value. There is a timing issue most people think is a problem BUT the ATO allow a administrative concession to defer the CGT event so that the CGT payable is matched to the date/s when the dev is sold off....Few accountants know about this one. Its a complex but simple approach I encourage many to use that can really save tax.

 

Thats great, thanks for sharing. Quick question, the document relating to bank financing mentions financing requirements of three or more dwellings, is there a rule of thumb for a block being subdivided into only two new dwellings? If you get DA approval with plans, quotes etc and sell one or both off the plan- will banks finance the deal?

 

Lenders will fund anything that is viable. The key issue is ....can it be managed as a residential loan rather than commercial. In the example you gave it should provided it meets with lender policies. A great broker is needed for any DA type plans to address all the financing aspects. Generally when it progresses to three or more lots on title then bank policies vary and many consider these commercial deals which come with more costs and some hurdles to consider.

The broker who issued that information would be a good person to engage with

 

Thanks mate - my broker is the best in the biz!

The reason it will be hard to get finance for the subdivision is that there is nothing to be held as security until the subdivision is 100% finished. Until then I am just spending money on a block of land and not improving the value - until the very last DA condition is met and the land has its own title. I can understand the bank's point of view on this...

 

Not quite correct.

Land has value. At best perhaps a 80% lend. They wont likely lend on the development potential value. Some do sometimes. !! eg a partial completed dev in stages...other property security etc.

Sometimes lenders can use different methods. And the timing of when the finance is needed may impact this. That can be a benefit of commercial lends but with lesser LVRs. And usually commercial lends can only be drawn after all your other finance. And commercial lends tend to look at experience and the project plan. They can knock you back if they think you have no idea. And contrary to beliefs a OTP sale isnt seen as rigid evidence of sale. It just reduces risk for liquidity sake for the lender. Lenders dont "value" OTP sales as they might fall over.