Tax implications of development

Discussion in 'Accounting & Tax' started by BigBadBanana, 27th Mar, 2017.

Join Australia's most dynamic and respected property investment community
  1. BigBadBanana

    BigBadBanana Active Member

    Joined:
    15th Jul, 2016
    Posts:
    35
    Location:
    Central Victoria
    Hello all,

    A complex question for those in the know...

    FACTS: my recently widowed mother and my aunty (her sister) would like to live next door to each other. They are both in their 60s, and would each like a small modern house in a good location. Obviously having all the ducks line up for this to work is impossible, unless we do it ourselves. I have founds a property which has an old fibro house which can be knocked down, the land be subdivided, and two houses built.

    This opportunity leads me to my first question...

    QUESTION 1:
    which of the following options would be most effective?

    a) My mother and my aunty enter into a partition agreement (I'm a property lawyer), buy the property (obviously paying full stamp duty as the subdivided existing property wouldn't be a PPR), demolish the old house, subdivide the land, and build two properties themselves (notwithstanding I would be conducting all of the logistics). They each have sufficient capital to do it all without needing finance;

    OR

    b) I buy the property, get a depreciation schedule, knock it down, sell it off-the-plan to my mother and to my aunty (they would pay stamp duty of the subdivided land value only, and as they are both pensioners, won't pay stamp duty), and build the two residences. I don't have the capital to do it, but they will lend the money to me interest-free to fund the project

    QUESTION 2:
    if I were do do it all myself, what is the tax situation...? More specifically...

    i. Obviously there will be CGT, but how does that work with off-the-plan properties?
    ii. GST: I assume this is taxable supply...therefore I could claim all GST spent....but would have to make the sale price plus GST. I'd also be eligible to use the margin scheme...

    Any help/advice would be much appreciated! :)


    **NOTE: this transaction/build is in Victoria
     
  2. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    You would have to remit 1/11 of the sale price to the ATO.

    But is this an enterprise and are you registered or required to be registered for GST?

    Consider the income tax consequences too and the land tax issues.

    It may work out better if they buy and do it themselves.
     
  3. BigBadBanana

    BigBadBanana Active Member

    Joined:
    15th Jul, 2016
    Posts:
    35
    Location:
    Central Victoria
    Thanks Terry. I should have mentioned that I'm not in this 'enterprise' to make a profit, just to help out my mother and my aunty...

    My VERY rough "back of a serviette" figures so far are:-
    • Acquisition of existing property: $360,000.00
    • Stamp duty and legal fees etc: $20,000.00
    • Demolition and subdivision: $60,00.00
    • Construction of properties: $460,000.00
    • TOTAL PRICE: $900,000.00
    The sale price would be just to cover my costs...hence my tax question.

    Re GST - I'm not currently registered nor currently required to be registered for GST purposes. However, would this be taxable supply? I'd be eligible for the margin scheme wouldn't I? (property is vendor's PPR).

    Re income tax - what income tax would I have to pay on this? I forgot to mention I'm not planning on making a profit, just want the sale price to cover costs.

    Re land tax - yep is a consideration, but it will only be about $750 a year (this is in regional Victoria), so isn't a big consideration.
     
  4. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    Market substitution rule would mean taxed at market values not what you sell at if selling for under market.
     
  5. Paul@PAS

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

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Some ideas
    1. Why subdivide into two titles ? A duplex ? Strata etc. Two properties on one title are quite popular.
    2. If you do it you would also be taxed as ordinary income, GST and duty issues. You cant claim scrapping if thats your thinking for the QS report prior to demo. Your intention is to build to sell not to produce income.

    Profit doesnt always mean a profit is made - You could project manage their purchase too. To use the MS means GST registration. Failing to follow the GST pathway correctly can leave the vendor exposed to the GST (ie you).

    Taxable supply ? New resi premises sold for first time are often a taxable supply. You have an enterprise if you assist them and the final issue of a taxable supply is where the resi gets taxed. Profit making intention is something the GST rules doesnt actually specific !! Just an enterprise....Worded vaguely in MT 2006/1
     
    Last edited: 27th Mar, 2017
  6. BigBadBanana

    BigBadBanana Active Member

    Joined:
    15th Jul, 2016
    Posts:
    35
    Location:
    Central Victoria
    That rule doesn't sound like a good thing...
     
  7. Paul@PAS

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

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Only if its a CGT event. I dont think it would be for the vendor. Its a taxable supply for consideration and hence there is no such rule for GST. Only a rule for non-monetary consideration.
     
    BigBadBanana and Terry_w like this.
  8. BigBadBanana

    BigBadBanana Active Member

    Joined:
    15th Jul, 2016
    Posts:
    35
    Location:
    Central Victoria
    Thanks for you response Paul.

    They would probably prefer a freestanding property on its own title...but open to anything that would save some dollars...

    Re GST and margin scheme...I must confess I'm a bit lost here - I'd still be liable for GST on the sale price regardless how much profit - is that correct? Is there any reason why I *wouldn't* use the margin scheme??

    Overall, it sounds like it'd be a lot simpler if they just did it, and I manage it...
     
  9. Paul@PAS

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

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    One title avoid subdiv costs and leaves each with independent strata title. One of the few functions of a 2 lot strata duplex is building insurance. Benefit of subdiv is one can more sell to a third party and this may be a good estate planning objective to assist deceased estates etc.

    GST on margin scheme just gives 1/11th credit for the land value used. GST still applies. Its not a Nil GST outcome. You would generally use the MS as it reduces GST often by up to 50%...Margin scheme sort of attempts to apply GST to the profit but its not a accurate way to describe it.
     
  10. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    BBB

    Why do you want to do the development yourself?

    Could they appoint you their agent to act in their behalf instead?
     
  11. Rob G

    Rob G Well-Known Member

    Joined:
    16th Oct, 2015
    Posts:
    966
    Location:
    Melbourne
    Why don't you just keep it all private and domestic dealings as the underlying intention seems.

    Mum & Aunty will pay stamp duty on the land and GST on acquisitions for the build (I assume you are providing skill and labour for free).

    Surely better than still paying stamp duty off the plan plus the GST using the margin scheme ... which factors in the gain in *value*, including the value of your contributions.