Tax implication for Sub-Dividing Existing Investment Property

Discussion in 'Accounting & Tax' started by Moni_2017, 9th Oct, 2017.

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  1. Moni_2017

    Moni_2017 New Member

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    Hi All,

    I was wondering if I sub-divide the existing property into dual occupancy and any expenses incurred on sub-diving the property is claimable as expenses.

    I have currently rented out a property and I am planning to sub-divide and built 2 units and rented them both. I am not living there now.

    Are any expenses like sub-division, planning, drafting, building, etc. are claimable?

    Thank you very much.
     
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    No. Interest may still continue to be deductible. All other costs become elements of the costbase.

    The tax issues are complex and depend what you are doing after completion. The developer toolkit assists to explain the key issues. If you are building to hold long term then the GST issues MAY not arise but I still recommend accounting for costs that show them.

    It would be wise to understand they key tax impacts in the planning so your costings are accurate.
     

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  3. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    subdividing itself doesn't trigger CGT but it depends on what you do after subdivison - change ownership, sell, etc.

    Costs are capital costs probably which would mean they would need to be apportioned between the 2 titles.
     
  4. Moni_2017

    Moni_2017 New Member

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    Thanks Terry. Since no income is generated during construction, only interest is claimable as NG during construction phase and rest of the cost is apportioned towards the value of each unit. Is my understanding correct?
     
  5. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    @[email protected] cheers for the tool kit, has been added to my resources folder for future reference.
     
  6. Moni_2017

    Moni_2017 New Member

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    Thanks for the toolkit
     
  7. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    assuming it is on capital account the interest and other costs could be claimable in some instances. Seek tax advice.
     
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    But its fairly useless if you do claim deductions :under TD 92/132 unless you have multiple projects / timing.

    This ruling only applies for an instance when land is held as trading stock. Building to rent doesnt mean its trading stock. For build to rent
    ATO ID 2001/479 (Withdrawn) has been replaced and the ATO refer to the rental guide and costs prior to being available for rent......which says

    Expenses prior to property being available for rent. You can claim expenditure such as interest on loans, local council, water and sewage rates, land taxes and emergency services levy on land you have purchased to build a rental property or incurred during renovations to a property you intend to rent out. However, you cannot claim deductions from the time your intention changes, for example if you decide to use the property for private purposes.
     
  9. MSB

    MSB Member

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    To make it clear. Let say the initial cost base for the existing investment property is $X. Now let's say we decided to sub-divide and construct 2 units with a total construction and associated costs for $Y. In this case, what would be the cost base for each unit? Is it half of ($X + $Y) ? The confusion is whether the original cost base of $X can be apportioned into the new units for future CGT?
     
  10. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Other things will affect this - Like scrapping and whether this land was ever a home. If there is no scrapping the present historical costs may well be added to all the build costs etc that arent deductible. Then 50% each if thats reasonable or apportion based on m2 or some other factor.
     
  11. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Why is there confusion?
     
  12. MSB

    MSB Member

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    Wasn't sure whether the original cost base of $X can be apportioned into the new units or whether the sub-division would be treated as a CGT event closing the original cost base.
     
  13. MSB

    MSB Member

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    Thanks Paul
     
  14. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    There is no CGT event as the land is neither disposed or or commencing to be held as trading stock. The land is one element of the proposed build
     
  15. StoneBridge

    StoneBridge Member

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    Hi All,
    Great thread.

    So what happens in the case where an existing home is purchased for X, demolished and subdivided in to 4 units for a cost of Y. Is the total cost base for CGT puposes based on X+Y+other costs such as interest, plans etc?
     
  16. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Could be.
     
  17. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Depends....If you keep them perhaps. If you sell them, no. Same as if you sell just one. It can trigger a CGT event on all the other portions of land.....And if you plan to keep them the interest or other costs may be deductible during the build not a part of the costbase.

    Personal tax advice is recommended