Land Gift and Tax Implications

Hi,

My parents currently own a parcel of land in Victoria which is debt-free, as it was purchased circa 20 years ago (post-1985).

Given the size of the land, it is suitable for a 2-townhouse development, which we are currently in the process of obtaining a planning permit / approval within our local municipality. On the land currently resides a house which was our family's PPOR until a couple of years ago, when it began generating income as a rental, as we moved into our new PPOR.

Given the land is not encumbered with debt, and the highly unaffordable nature of Victoria's property market, my parents have indicated an intention for 2 townhouses to be ultimately developed on the land but to be transferred to the respective names/ownership of my brother and myself. By doing this, we are essentially only paying for the construction cost of the townhouses and not the underlying land, thereby leaving a decent amount of equity for us between the construction cost of the the townhouses and their ultimate market value.

Both my brother and I would be first home buyers, and given the residual land value would be less than $600,000 per subdivided lot, I believe we would satisfy the requirements for a stamp duty exemption. In saying this, no matter which way we try and skin the cat, we can't seem to arrive at a common consensus as to the most tax efficient structure to adopt.

In determining the best structure, the main considerations are whether there exists any, and the extent of any CGT / Stamp duty liability associated with ultimately having 1 title in my name and 1 in my brothers.

Any thoughts?

P

 

I advised on something similar last week

Your parents should get legal advice as should you and your brother there are lots of issues as well. You don't know what you don't know.

Think
Asset protection
CGT
finance
pensions
death of any one of you
asset protection on death
family law
duty
land tax
etc

 

Agreed - we are starting to do that now.

After reading multiple threads, I think it will end up being gifted to a bare trust with a deed of partition PRIOR to transfer of underlying land. I read a paper on this which was posted on in these threads, and I believe by doing it this way, you can avoid CGT / Stamp duty on the subdivided lots.

 

Yes, duty could be avoided on a subsequent transfer. But what about all the other issues?

How old are your parents?

 

I agree there are a lot of other issues to look at.

Parents in 60's.

 

will they qualify for the pension?
Why do they want to dispose of the land?
Can they qualify for finance?

 

Do you guys want to own ips next to each other?

 

Won't qualify for pension and will qualify for finance, but ideally we want to pay for the construction finance given the titles will ultimately be in our own names. Sole reason for disposition of land is to allow my brother and I to construct our own townhouses and have them in our own name, so we can get into the market

 

Does this have relevance to the initial question posed?

 

This sounds like it may not be the best move. There are other ways they can help you get into the market.

Have they considered the CGT consequences? How much CGT?

 

This will be the best assistance given the equity position upon completion, hence allowing us to immediately re-invest.

They will not have any CGT consequences upon gift of the land to us/a bare trust of which we are the beneficiaries, through either using the PPR or the substitution rule. Even if the PPR rule is not used, the substitution rule results in no CGT having to be paid.

 

This doesn't sound correct.

The main residence exemption does not apply to vacant land.

What is the substitution rule?

 

Yes in that the question changes if your parents develop and sell. Or just sell as a dev site.

 

Re: Exemption - It's not currently vacant land - there's a house on there currently earning income. So, if it's gifted in its' current form, because we only moved out 2 years ago and it was our family home, the PPR rule can still be used I'm assumine

Re: Substitution rule - from my understanding, because the property only went from being our PPR to an income generating asset 2 years ago, for the purposes of CGT, the cost base is taken as from the time the use of the land went from a PPR to an income generating asset. Hence, because that was in 2017, there would be no gain in this time period.

 

Only if they are not going to be claiming their current residence as their PPOR for CGT purposes. You can't have two concurrent PPOR exemptions (very few exceptions).

You can choose at least one of your neighbours.

 

I'm not sure I fully understand, but we are going to move into the townhouses which are ultimately constructed on the land. This way, we have townhouses in our own names with usable equity (being the difference between the construction price and what we can sell them for in the future) that can be used to subsequently re-invest.

My parents have the capacity to finance the construction of them, but that would defeat the purpose of the transaction as we are seeking to take on the obligation of paying for the construction cost of the townhouses, while simultaneously making sure it is tax efficient.

 

If the substitution rule is used rather than the PPOR main residence exemption, does that not still allow for the PPOR main residence exemption to be used on their current house? That is, isn't the substitution rule a function of how the CGT laws operate, rather than a function of a Main Residence exemption?

 

think you are confusing a few things.

There is no PPR rule for income tax. There is a main residence exemption, but this cannot apply to 2 properties for an overlapping period. So, depending on the circumstances, counting this one up to 2 years ago as the parents main residence will mean their other property is subject to CGT.

The substitution rule - i haven't heard it referred to as that - the cost base is reset when the property starts generating income. But you said it was vacant land. Is it earning income? the above applies too.

 

I understand there's no PPR rule for income tax, but CGT rules will apply as the property is generating income. We are talking about the same thing when I say substitution rule.

It's not currently vacant land. As per my initial post: "On the land currently resides a house which was our family's PPOR until a couple of years ago, when it began generating income as a rental, as we moved into our new PPOR."

 

There may be minimal CGT potentially, but transferring declaring a trust will be a CGT event and will potentially effect the new main residence.