Tax treatment for selling with development plans

Hi Tax Gurus!

My mother in law has asked me to look into maximising selling her PPOR. She gets pretty stressed thinking about council planning/designs/building/etc so i am going to help her out.

In relation to minimising tax, whats the best way to proceed.

- She purchased in 1991 or so (after cgt introduced) for around 150k
- its been her ppor ever since
- she is retired, guessing around 1.5m in different funds witg dividends providing her retirement income
- ppor is in carnegie (sth east melb), prob worth around 1-1.2m
- no loan
- title in her name only

So i was thinking maybe get plans for a dual occ development, then sell with plans. Would this mean no cgt/tax payable?

And out of curiosity, when do you loose the ppor cgt exemption on two lot developments (assuming capital, not income assessed):
- point of plans approved
- after built both dwellings, but still only on one title
- after subdivision completed and two titles(one for each dwelling)

Love to hear any thoughts/advice

 

If you sell your main residence with plans approved for something else the exemption you will generally not lose the main residence exemption.

The point in time you no longer have a main residence is a question of fact and is largely based on your intention.

For example selling two properties on the same title to the same purchaser where both properties were used as a residence will mean that the main residence exemption will cover both properties. However if you sell to two different purchaser the exemption can only cover one residence.

This is more complex but I have tried to give you the guts of it.

 

Read this page and especially the last example.

Subdividing and amalgamating land

 

Ross makes a good point but its also possible that TD 92/135 can apply in you build and sell them. Just because land "was" a home doesnt mean it continues to be exempt. A CGT event will occur and that can be a problem for a enterprise that involves a development. The strategy is to avoid that trigger point.

Sale of the land with a DA may be a sensible strategy that avoids GST (!!) and many other tax concerns. eg : Mum gets a DA and stays in the home and sells the whole site with a DA is very very different to doing the development and then selling both. The trigger to avoid is mum moving out and demolition. A demolition prior to sale will trigger a possible GST problem. Run the numbers and deduct taxes in both examples to see the difference. It may be tax free if planned carefully.

Also factor in income and income effects on any pensions etc if applicable. She may lose the exempt home benefit so dont ignore this.

 

Paul makes a good point. The point at which a 'capital asset' becomes 'trading stock' is always the key.

Following Statham's case will allow most clients to argue 'capital account' and a 'mere realisation of a capital asset'

Extent of involvement in the subdivision was key in that case. So question always sit around when and if the land and buidings become trading stock.

 

Great thanks for the advice.

Sounds like the smart move tax-wise is to sell with DA, and has the bonus of being the easiest option!

 

Considered selling to a related entity?

 

agreed terry. worth doing the sums to estimate the income tax and/or cgt payable on the subdivided back block and any stamp duty payable on transfer to a related entity.

advantage of the strategy is that if the house and land (under 2 hectares) is sold to a related entity than the main residence exemption can be applied to the entirety.

if however you subdivide and sell the back block it will be subject to CGT and/or income tax and cant use the main residence exemption on that seperate asset as it was never your main residence.

 

Hmm this is not an option we have thought about, i will do some feasibility and discuss with the mother in law. Thanks!

 

Given in Victoria (though no mention of husband but assume for this example there was) could you sell to spouse post permit at best market rates, no cgt no stamps. Then spouse (pre registered for gst), carries out development paying cgt and gst (reduced by margin scheme). This could be a very good way of minimising tax but also extracting the most value out of a family residence if done properly..,

Only concern I can think of is the ole is it a scheme to avoid tax? But what if one partner has more experience in development and that's the partner that the asset was transferred to prior to subdivision?

 

This could be possible. But advice would be needed to determine if it would be suitable.

 

The GST registration is a issue that is inevitable and the fact hubby is already registered is not a issue. The vendor would need to be registered no matter who. Hubby would land 100% of the profit as assessable income.

The timing of the spouse sale must consider if its a sale as part of an enterprise. I think it may and timing issues need advice. I suspect that and the scheme to obtain a tax benefit occur...

 

just sold DA, reasons mentioned above no GST, no build shorter time frame. I buy in a Trust

 

The issue however for the trust is if the amount distributed is a capital gain or ordinary income. Possible its income if one of the issues involved in sale was the DA. The trust may assist to split income but tax issue is - what type of income. ATO issued a 2014 taxpayer alert re taxpayers who seek to develop or generate property ordinary income and funnel through a trust and classify it as capital gains. Google TA 2014/1

Its defiantly wise to consider if its cheaper and faster to bypass the actual dev and leave it to others. You may generate lesser profit but if its faster it frees profits for the next. The sale of an existing property to bypass GST is somewhat complex and the property at all times must pass to the the buyer as residential property and not something that was residential. Danger is it leaves the vendor with the GST liability. So it takes more than not demolishing. Sell with tenants and a DA and they can punt the tenant.