Outcome of Subdivision before Purchase

I manage subdivisions (land surveyor) and have a client doing something interesting and wanted to explore the tax and legal issues of what he is doing.

Situation:

- He has enterred into a contract to purchase a property with plans and permits for 3 luxury townhouses in a bayside council suburb of Melbourne.

- the settlement is in 8 months

- he wants us to get the property subdivided into 3 lots, and registered, BEFORE the land settles in 8 months.

- then when he settles in 8 months, he will purchase 1 lot, then have two other partners purchase the other two lots, they will then build the townhouses.

- so effectively, the current owner/vendor is doing the subdivision and selling the three lots, instead of the predeveloped single lot. Our client is organising and paying for it. This will include demolishing the existing residence, and connection all the services to the new lots.

I have a few queries about this:

- what is the tax treatment for the vendor (the property is currently a rental), but if it was a ppor what would have happened?

- is this a development agreement style purchase or standard contract?

- what tax/duties benefits has the client recieved from this setup?

- has the vendor exposed themselves to a tax or duty that they wouldnt have had if it was a normal sale?

 

Oh... that’s sounds messy....so the owner would be selling three vacant blocks of land?

 

Yes that is correct

 

It is taxable. Potential income tax and gst. Seek tax advice. How can land continually be a main residence and be developed? It cant

 

Yikes. Tell them to go and see a tax specialist before signing anything.

 

I would say very messy for the owner but that is not your client right?

That poor owner is potentially going to get into a big mess probably with GST, CGT as he is the one who has created the vacant land. The new owners (your client) may find themselves in a pickle too and not able to use the margin scheme on their project depending on how it's been set up

They may also find themselves unable to claim some of the costs they are incurring before purchase because they don't own it.

I am no accountant but I think the short cut they think they are all getting is not that positive for anyone.

 

Our developer toolkit addresses a variety of tax issues and helps a more information discussion based on each situation. Subdivision itself is not a taxation event but may be a element of something else. The "us" part may be a element of a enterprise and all parties could end up being jointly and severally liable for GST and more.