Tax Planning to Minimise Tax

Discussion in 'Accounting & Tax' started by Paul@PAS, 5th Dec, 2016.

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  1. Paul@PAS

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

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    I see many client instances of "acting first and seeking advice later". This can be buying in the wrong name/s. Failing to consider structure etc. A recent example provides a good example of why getting early advice is critical. It can substantially change the taxes payable.

    Dave and Mable are retirees and thinking of soon entering a retirement lifestyle estate. They own a older decent sized lot of land they have owned for 30+ years and there is no CGT payable if it is sold. But they and two of their adult siblings realise there is enormous potential to sell the land, subdivide and perhaps even develop on the land and sell. They came to us with the idea of selling to a company that they would equally own shares in suggested by another accountant. We dont recommend that their children financial join in the project but could financially benefit from generous gifts afterwards. A concern of a sale to a entity would be that the market value method is affected and more profit may be taxed. (explained below). The other concern is that stamp duty is triggered. We seek to avoid a change of owner to avoid duty. The parents obtain a documented loan for the project from a relative under a written loan agreement.

    Fortunately they dont receive pension benefits but otherwise this factor must be explored. In consultation with town planners the scope of the venture is defined and one of the better options is to sell the subdivided land undeveloped as the capital investment required to construct three dwellings is beyond likely borrowing to achieve a reasonable standard. A slightly lesser profit can be attained without building and the real estate opinion is that sale would be far far easier and faster with vacant land in the suburb involved. The agent considers cleared vacant land to be a rare and highly sought item and it commands a premium.

    One strategy proposed is that the land is to be valued for two reasons:
    1. CGT event K4 will apply when the land is no longer held as a main residence but is held as trading stock.
    2. GST margin scheme

    Our advice is that the valuer is to be advised on the correct valuation method to use by us. The key issue is how to value the land ? The value of the land together with the home is approx $2.2m and is area of 2900m2. However for tax purposes a valuation that considers its "highest and best use" is used. This is the highest and best use by the existing owner. This basis of valuation cannot be used by the existing landowners if they sell the undeveloped land to a development entity as they cant assess the best use of the future buyer. The best value for the undeveloped land sold as a single lot is just $2.6m. It is essential that event k4 is triggered while the parent own the land. This values the three lots at $1.25m, $1.35m, and $1.7m. That is a combined value of $4.3m. Using the "best use" strategy saves $1.7m from GST and also income tax.

    What does that mean ?
    • Dave and Mabel's exempt capital gain is maximised so that they pay no tax whatsoever on the CGT growth from the $330K they paid to the expected value of $4.3m. If they had sold to a entity the possible additional tax is $550K+. Stamp duty of $128K
    • This preserves and maximizes tax free profits
    • GST on future sales in minimised. Electing to use the margin scheme is really no choice at all. The valuation establishes the land value at $4.3m. GST is only payable on sales where the individual sales exceed the values above. So if the largest lot sells for $1.65m no GST is payable. If it was sold without use of the margin scheme the GST payable would be $154,545
    • Reducing taxes adds directly to profit. Every dollar of tax saved is a extra tax free dollar of profit
    Dave and Mabel have to spend approx $225,000 on costs to ready the land to subdivide. These costs are numerous and include plans, townplanner fees, council fees, water, sewer, electricity, civil construction and much more. Loan interest of $12000 is paid

    When Dave and Mable sell they sell the three lots for $1.35m, $1.4m and $1.9m respectively. GST amounts to $3,181 and they claim $12,225 in GST paid on costs incl the agent fees and commissions. Selling costs and the costs to develop amount to $315,000.

    The profit they make over and above the $4.3m is subject to ordinary tax. The profit is $2,044. Dave and Mabel pay just $54 tax.
     
    TSK, Redwing, Perthguy and 4 others like this.
  2. Gockie

    Gockie Life is good ☺️ Premium Member

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    Ok.... this went right over my head (sorry to say).
     
  3. Apprentice

    Apprentice Active Member

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    I own a house which has been used for rental for 8 years. Have a DA for 2 townhouses and looking at selling with the DA. Considering demolishing the house, as can get that done for next to nothing from a relative. The real estate agent said that the vacant land with a DA will attract a higher value. Trying to understand your example above, if I was to use your method for valuation, is that based on my going ahead and subdividing the land and then selling the subdivided land at a higher value ?? Not sure, how it went from 2.2 to 2.6 to 4.3 million in the above example.
     
  4. Scott No Mates

    Scott No Mates Well-Known Member

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    I assume that Dave & Mabel didn't sell to the company, thus saving $$ on stamp duty however did they consider the risk of continue to hold the property in their own names?

    If the property was CGT exempt, how can the margin scheme be selected If the purchase predates the existence of the margin scheme?

    (I'm with @Gockie)
     
  5. Mike A

    Mike A Well-Known Member

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    @Paul@PFI it will go over most peoples heads. Even most accountants would just look and go too hard. Sorry mate its too long and complicated. In fact most would skim and read the bottom. End result tax saving.

    Would be great for a tax training session for internal tax accountants.

    Main message for the masses. One situation structured different ways can lead to different outcomes some which are more favourable for tax than others.
     
    Last edited: 26th Aug, 2018
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  6. Scott No Mates

    Scott No Mates Well-Known Member

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    My brain hurts. :confused:
     
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  7. Mike A

    Mike A Well-Known Member

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    Its like an electrical engineer explaining to me how the new configuration and new technologies in intimate detail will result in my business saving 1m per annum. Unless i have an engineering degree ill just sit there thinking about the weekend with my eyes glazed over.

    I just need to know that the new configuration and new technologies will save my business 1m and have safeguards in place to ensure if it doesnt i can sue. Accountants have that with professional indemnity insurance.
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    @MikeLivingTheDream - at least I could probably understand 90% of the engineer's proposal.
     
    Mike A likes this.
  9. Terry_w

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

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    I think the tax payers are got to know when to ask questions, and then when to seek a second opinion. Knowing what you don't know if the key.
     
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  10. Mike A

    Mike A Well-Known Member

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    And even then you can get seven different opinions as we know from a mutual clienta recent horrific experience.
     
    FredBasset likes this.
  11. Terry_w

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

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    **** my grammar is terrible!
     
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  12. SatayKing

    SatayKing Well-Known Member

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