Join Australia's most dynamic and respected property investment community

Tax Effect on subdivided property

Discussion in 'Accounting & Tax' started by Agent99, 27th Jun, 2015.

  1. Agent99

    Agent99 Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    196
    Location:
    Adelaide
    Purchased property with house, subdivided into 2 lots one with house and land, the other land only.
    How do I calculate the cost base for calculating capital gain on 1.the land 2. house and land in SA ?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Land size and building value. Get a valuer in.

    And don't assume the CG laws apply - they may not.
     
  3. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

    Joined:
    24th Jun, 2015
    Posts:
    227
    Location:
    Philippines
    Original intention ? Was it to buy , subdivide and sell ? How long have you held the property ? Ever used as your principal place of residence ? Any mitigating factors which changed your original intention ?
     
  4. Agent99

    Agent99 Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    196
    Location:
    Adelaide
    Intention was to subdivide, have rented to students for 12 months, held for approx 15 months now, never used as PPOR
     
  5. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

    Joined:
    24th Jun, 2015
    Posts:
    227
    Location:
    Philippines
    sounds like profit from an isolated transaction. need to consider that the sale will probably be on revenue account not CGT. Also look at GST implications as well.
     
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,358
    Location:
    Sydney
    The apportioning must be done if its subject to income tax or under CGT rules. The same issue applies regardless. In case you ask, You cant "value" one lot based on market then deduct this from total cost to arrive at the other cost. Instead you need a qualified valuer to provide a opinion on the apportionment of the total cost you paid over the two lots based on area, site use, structures etc....

    Its you start point to a long list of tax issues that will also need guidance
     
  7. Hugh

    Hugh Member

    Joined:
    19th Jun, 2015
    Posts:
    7
    Location:
    Sydney
    Apologies for my ignorance, a couple of questions on the valuation aspect.

    1. If the bank val at the time of purchase says the property is worth say 500k in total, comprising land component 200k and house 300k, and the land is subdivided a few months later can you just divide the 200k by the percentage of the land divided off to form the new vacant block to work out it's value? What time frame would you estimate that this subdivision would have to be completed by before rising land values make the original bank val out of date?

    2. If new vals are required, should this occur at the time of subdivision or perhaps months later once a new building has been constructed on the vacant subdivided block?

    3. Is there likely to be much of a tax advantage/CG/GST implication in having new vals done at subdivision compared to after construction?

    Thanks, any advice very much appreciated.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney

    1. No. because the land is probably not going to be chopped exactly in half and each portion is in different positions. The house may be valued more or less too.

    2. The val should be done on the basis of the land and existing house, you will have the cost of the new build as you are building.

    3. no
     
  9. Hugh

    Hugh Member

    Joined:
    19th Jun, 2015
    Posts:
    7
    Location:
    Sydney
    Thanks Terry!

    Quality advice, much appreciated. Just to clarify, its best to get new vals done at the time of subdivision?

    Cheers
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Before or after. You just need to know the land size. Probably best close to the split so you can split the loan into the relevant portions when the securities change. Might as well do it all together.
     
  11. Hugh

    Hugh Member

    Joined:
    19th Jun, 2015
    Posts:
    7
    Location:
    Sydney
    Cheers Terry
     
  12. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,105
    Location:
    Melbourne
    Hmmm this is interesting!
    My current scenario.
    House purchsed 3.5 years ago with brother for 586, was not purchasd with the goal of subdivision, life changed.

    Got plans and permits to develop dwelling at the rear. About 8k was spent from own money.

    Got a reval (did not mention subdivison) and property valued 640 in which created a 3rd split for additional funds for the subdivision.

    Subdivision process is underway, permit issued and now just working through the conditions.

    The end game is subdivide, sell front property (CGT exempt as both our PPOR). Then get rear land valued. Based upon the valuation I will purchase the land of my brother and then build.

    So few questions:
    Do I have any concerns regarding buying the rear lot with the exception of some small stamp duty?
    Would my brother fall into CGT or GST when selling te rear to myself as it was never purchsed for that reason?
    I thought I could only get a true valuation done once it had been subdivided? If you can get it done before then I am not sure it would make sense because works such as demo, fences, driveways.etc need to be constructed.
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    albanga - not necessarily exempt because was PPOR undertaking a development is a commercial activity.

    You should be concerned about apportioning the loans correctly between the splits.
    If jointly purchased then you would be buying brother's share. He would be up for GST and CGT/Income tax. Need to think about the loans here too. changing ownership means deductibility issues.
     
  14. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,105
    Location:
    Melbourne
    Hey Terry,
    Not exempt from CGT on the sale of the front property? Can I just ask under what circumstances? I have read what seems like countless articles regarding this and all indicate the front property keeps the CGT exemption. Do you have an actual situation this was not the case? Keeping in mind we held the property for over 1 1/2 years before we decided on this. It was never purchased with that intent so my understanding is "realisaiton of an asset"

    Also regarding the deduct-ability I am not sure I understand?
    My brother is selling both properties so he exits the deal with a lump sum cash and no mortgage.
    I am selling one dwelling and then buying a block of land to build my PPOR so again I am not sure why deduct-ability would be a concern?

    Also regarding apportioning of the loans. My brother has his split and I have mine. The 3rd split for the subdivision was set-up with an offset account. 42k is the loan amount and currently it is drawn down only 4k so the monthly payment just comes from the offset account linked to it.
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    There comes a point when the property can move from capital account to revenue. Don't assume that a development will be under capital - best to assume revenue.

    Not sure what you mean about your brother's properties. Are these jointly owned? Do you have a deed of partition in place?

    The loan situation sounds messy.
     
  16. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,105
    Location:
    Melbourne
    But when is this assessed?
    http://www.yourinvestmentpropertyma...hen-subdividing-and-selling-land--193999.aspx

    That is a very good article but I feel very confident if the ATO tried to put it as revenue I would have a strong case. My brother and I purchased the property to get into the property market. We lived in the house for a year before he met someone and they got pregnant. So our options were sell and cop a huge loss after paying entry costs or "realise the asset". It was never purchased to make a profit.

    Sorry my wording is incorrect. when I say "brothers properties" I refer to after subdivision. We will both own 50/50 the front property with the dwelling. The rear property which will just be land.
    My brother will sell the front home, along with myself.
    At that point, we will both own JUST the back parcel of land together. I will purchase this from my brother and then build on it.

    So say it is capital in nature then from my perspective no CGT for me on sale of front dwelling, no tax implications on rear as im not selling it, im buying it. Just need to pay stamp duty.
    For my brother, no CGT on front but something on selling of the land, which one I am not sure?

    Not doubting the loan situation is messy but that is what happens when you have 2 parties (hence never buy together! haha). But regardless what other option did we possibly have. We have no cash to pay for the subdivision so what else would you have proposed if it were you?
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Have you sought advice?
     
  18. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,105
    Location:
    Melbourne
    Regarding Tax? If so then yes I spoke to Paul from the forums a while back on the phone and from the information I provided him (much the same as I have provided here) he believed capital in nature. It was a while ago but he mentioned GST payable on the sale of the rear lot.
    Also got advice more recently from another accountant but he basically said come back when you are closer to getting the subdivision done.

    Regarding Finance then not from an investment focused broker. That being said I am not sure this fits into that category and TBH still do not understand the implications of this structure if it is not investment focused.

    And I appreciate all your responses Terry.
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    But was it a general chat or proper advice?

    You need to apportion the loans properly between the properties taking into account the property and the change of ownership. If you don't get this right you could be left with a large loan with little interest being deductible.
     
  20. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,105
    Location:
    Melbourne
    It was just a general chat with Paul. I will likely be engaging him again when closer to subdivision.

    You just got me thinking about finance though because I had not considered what happens with the mortgage when the property becomes subdivided? I imagine the lender will need to revalue the new lots separately and then we will need to refinance accordingly?

    If so then would they have just 1 loan secured by both properties? Or would they allow 2 new loans secured against each new lot?

    I think this is beyond my level of understanding after a year in these forums. Your dealing with joint owners going into a subdivision whereby one brother has more equity and the other wants to buy him out of the new parcel.

    Will need to wait and see what my broker says about this one!