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Subdivision newbie - CGT implication question

Discussion in 'Accounting & Tax' started by C-mac, 11th Sep, 2016.

  1. C-mac

    C-mac Well-Known Member

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    Hi folks,

    Hoping some of the accountancy and tax experts can weigh in on this one (perhaps @Terry_w you might have insight?). Please excuse my ignorance, I've never subdivided and built before, but I just want to understand the tax 'facts' before I commit myself to any upcoming subdivision-likely property purchases!

    Here goes...

    I'm looking to purchase an investment property on a large block with dual street frontages (and the original house front-sided, with a long clear - and flat! - backyard opening to the back street's frontage). Basically, a classic textbook 'dream' candidate property ripe for subdivision. Thorough DD also evidences the demand for smaller houses in the area is fierce with renters.

    It'll be purchased purely as an IP (not a PPOR or anything), for (for example's sake...) $300K, with an 80% mortgage on it.

    My future plans are to subdivide the block with Council (a quite development and subdivision-friendly council, as it happens, with great - as in modest! - minimum-lot-size standards). Then, I'll do one of two things (of which I have tax-implication questions below that may sway my decisions). Either:

    1. Pure subdivision of land only, and sell of second back lot for profit; or
    2. Subdivide the back-lot onto it's own title/lot, then build a new house on the second lot (where I'd either sell this new houses, or keep it and rent it out thereafter for the medium-long hold term)
    I have questions on both options please:

    Subdividing only:
    • Should I wait 1+ year of ownership of the original block/house (to fulfil current CGT discount requirements. I'm not referring to CGT-exemption that is entitled to owner-occs for PPOR's, but merely the CGT discount that long-term buy-and-hold investors are currently entitled to) before subdividing and selling? Or can I buy this house, subdivide within say 6 months, sell the new block off, with no different CGT implication on the existing house (which I'll retain as a buy-and-hold property)
    • I find this option appealing because the house as it is now is probably worth about $250K. Buying it for $300K is basically buying the worth of the house as a subdivision opportunity. But that means that the original valuation on the existing house will be $300K. This means that once its block is cut in half, the value will obviously diminish probably back to $240K or so for the original house. I'd then cosmetically renovate the existing house + add a 4th bedroom internally within the same floor plan / footprint with the intention to artificially bring that value back up to around the $300K mark.
    • In this instance I feel this is smart because I'm effectively maximising the value of both blocks, whilst having capital gain assessed at that differential between the purchase price (an over-inflated $300K), and say a sale price in ten years for the original house on its new half-size block (e.g. say $500K). This means that the CGT-addressable $200K of profit is smaller and less tax is payable than say a differential between a $240K valuation and a $500K later valuation.
    • Is this right? Or, will I be required to revalue the existing house once its land is subdivided off (e.g. a re-val at say $240K), and will the ATO then say "nope, this $240K is the amount we need to consider for CGT assessment". They can't do that, right? They have to take the initial value (being purchase price of $300K) for the original block, as the 'starting' value for CGT assessment thereafter, right?
    Subdividing and building on second dwelling:
    • There are two options here. In both options, I'd still cosmetically renovate the original dwelling and hold it long-term as mentioned above
    • The first option is to subdivide, build a small 3/1/1 house on the new block at the back, and sell it straight away. But let's say I wait 12+ months to do this so that the overall 'holding' between the two blocks is 12 months. In this instance, will CGT be payable at the full rate because technically I owned the 'new' block for less than six months? I.e. lets say I buy for $300K and hold for 15 months whilst planning the subdivision and build. Does this get taken into account when I subdivide in month 16, then within 6 months after that I've built and sold straight away? Or will the ATO simply say "no, 12 FRESH months need to reset, seeing as you've created a brand new lot and a brand new 'property'"? If this is the case then I'd need to hold the newly built house for 12+ months before selling (makes CGT tax sense to do that). From what date would 12 months of ownership on the new dwelling then be determined? From the date I first subdivided the land and took 'ownership' of this new plot of land? Or from the date of completion of the build and its lodging of certification of habitation? It seems this second milestone is the more likely date from which "ownership of the property" would be calculated from. Is this correct? If anyone knows, that'd be great!
    • In the second instance (the more likely one), I'd build new and then rent it out and hold as a long-term investment. Let's say I hold both houses for 10 years thereafter. Would each be entitled to the CGT discount when I sold each one off? Obviously I'd only sell one per financial year, but just thought to check on this.
    Any thoughts you have would be great!
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Ive just skimmed your post on my mobile phone but have you considered.

    1. Cgt would probably not apply if your intention is to buy subdivide and sell. So no 50% discount.

    2. Gst.

    Paul has produced a document on tax issues and developing and has attached it to a few of his posts. You s b ould have a read of that.
     
  3. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    As @Terry said, you need to consider if CGT will apply or if you will be taxed on revenue account. If you subdivide, build and sell, CGT probably won't apply. If you subdivide, build and hold, CGT probably will apply. If you subdivide and sell (without building), CGT probably won't apply although you may have an argument that it should. If you're on revenue account you can't access the 50% discount no matter how long you hold the land for.

    Whether you are on capital or revenue account you will need to apportion the $300,000 cost between both lots.

    If you are subject to CGT, the date you originally acquired the land is the relevant date in determining whether you are eligible for the CGT discount. The date you subdivide is irrelevant.

    Development is one area where you should always get some good tax advice as there are many issues that need to be considered (such as GST as @Terry_w pointed out).
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  5. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    Let's say you buy the property with the primary intention of renting out the house. The land at the back of the property is superfluous for this purpose and the tenants wouldn't maintain it. If you could have bought just the land and the house at the front you would have (but of course you couldn't do that). You decide to subdivide and sell the land at the back while continuing to hold the land and house at the front as an investment. You realise a profit in doing so but did you have a profit making intention when you purchased the properly? I think there is an argument here that the gain from the sale of the back land should be on capital account and eligible for the 50% discount if held for more than 12 months.
     
    Terry_w and Brady like this.