Reasonable apportionment....

Discussion in 'Accounting & Tax' started by Sheshop, 15th Jun, 2022.

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  1. Sheshop

    Sheshop Well-Known Member

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    Having completed my subdivision this year, I'm now at the fun part of apportioning the original cost base and I'm finding it difficult as the ATO is very vague. They say to apportion the cost base on a "reasonable basis"... My reasonable basis could be different to the ATO and I don't want to get myself into trouble.
    The property was a large subdividable 8125m2 block with an old but solid house at the rear which I have retained and used as my PPOR. In all fairness, I believe the house contributed little to no value and other developers intended to knock the home over. I however, needed somewhere to live and partially renovated it to make the home habitable and will now carry out extensive renovations to bring it up to a good standard (now that I actually have some money).
    I have created an additional 3 lots (total of 4 including PPOR).
    Here's my "reasonable basis" and I'd be curious to know what you consider reasonable?
    Purchase price $820,000 (Oct 2017)
    Using a valuation carried out by the bank's valuer (Jones Lang Laselle - Oct 2020) I've worked out a percentage to assign to each parcel based off their "as completed valuation" :
    Lot 4 (2000m2 house lot) - $675,000 - 33%
    Lot 3 (2000m2 vacant) $450,000 - 22%
    Lot 2 (2000m2 vacant) $450,000 - 22%
    Lot 1 (2125m2 vacant) $470,000 - 23%
    Is this reasonable?
    Based on the above, the ATO might argue that the value of the physical house is $225,000 so I should take $225k off the $820k, divide the balance by 4 which gives you the land only component and then add $225k to work out the apportionment of Lot 4....however in the time between purchase and valuation I've invested $90k in some renovations and the market increased.. ?? This is where "reasonable" gets skewed and I'm obviously biased because I want to get the best outcome for myself.
    It's impossible to use like for like comparison as there are none, this property is one of the few remaining large parcels with subdivision potential in the area. The closest comparison is the property next door that sold with no house for $947,500 in 2019 and the land is 25% larger.
    Id love to hear your thoughts.
     
    Last edited: 15th Jun, 2022
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A reg valuer will need to apportion the existing dwelling and its land from the other based on its historical costbase. Its a skill only a reg valuer can support as objective sales data will be a requirement (comparison approach) . Then you may consider a homogenous rate for the balance based on m2. So in essence the costbase will be split into 4 assets. Pretty standard. As will acquistion costs etc using the same proportioning. However land is often not homogenous and say a water front lot may value diffferently to a battle axe etc. These factors are mentioned in the ATO link. Noise affected etc In which case perhaps know the total costbase and have the valuer apportion each lot. If its all pretty homogenous land for lots 1-3 the m2 may be "reasonable". It shouldnt cost more for all 4 to be apportioned v just the house and land and the vacant land.

    The ATO is well aware of people who apportion incorrectly (either way) and its a common review issue when lots are sold. I had a client who did what I described above and ATO passed the site drawings etc to a independent valuer who the ATO told me accepted the basis that had been used. So they do check and also have access to valuers to get a arms length view
     
    Last edited: 15th Jun, 2022
  3. Sheshop

    Sheshop Well-Known Member

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    Thanks Paul, given JLL carried out the valuation and it's quite an in depth report (43 pages) would I be best engaging them to carry out the valuation again asking them to base it on the date of purchase?
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes possibly a trivial additional matter. Explains its purpose is to APPORTION the costbase.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes I would get a valuer to assess the historical value and apportion it based at the purchase date. Then any expenses relating to particular lots can be added to that lot's cost base
     
    craigc likes this.

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