Vacant Land: Capital Asset or Trading Stock?

Discussion in 'Accounting & Tax' started by Luca, 7th Dec, 2017.

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  1. Luca

    Luca Well-Known Member

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    Bit of confusion reading on line:

    Case 1
    Buy house, subdivide and sell the land at the back within the year. Do I need to register for GST or I just pay full CG tax?

    Case 2 - H&L
    Buy Land -> titles after 1 year and half -> Settlement -> I decide to sell within 6 months (not building on it anymore).
    As above, considering it is a one off, do I just pay the CG tax or is it treated as trading stock?
    Also are in this case the loan interests deductible? My understanding is no however all the expenses (council rates, interests and so on) can be add to capital cost -> "reduce" capital gain -> pay less taxes.

    Thanks
     
  2. Mike A

    Mike A Well-Known Member

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    What was your original intention ?
     
  3. Luca

    Luca Well-Known Member

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    I would say Case 1 buy and subdivide, for case 2 build but then something changes and you have to sell.
     
  4. Paul@PAS

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

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    MT 2006/1 is a ATO ruling in general terms which considered "what is an enterprise". A plan or systematic process to acquire, subdivide and sell seems to satisfy that. Therefore an ABN is required. Vacant land is a taxable supply when sold by an enterprise. GST applies as a consequence assuming the land value will be above $75K. GST is 1/11th of the sale unless the margin scheme is available and chosen by the vendor and agreed in the contract. GST on some costs may reduce the GST payable eg GST on REA selling fees for the vacant land (only) etc.

    Its essential to obtain clear and personal tax advice to reduce the GST and ensure profit is correctly determined and to address record keeping (you need to comply with contractor reporting rules too) as well as what to claim and when. Apportioning between the two sites will be relevant and part of the advice.

    I would think that if case 2 occurs then case 1 already applies as your intent at the time acquired. Changing your mind doesnt change the tax position. There is no time limit to that issue - A few years back a case concerning 14 years was held not to be a CGT asset but on revenue account. One of the key issues here is that the actions of seeking to subdivide appear to have been planned as means to enhance value and a sale at any time to take profit is just that - profit and not a capital gains event.

    Of course too there are three (not two) possibilities here :
    1. Land / property is a CGT asset (unlikely)
    2. Land / property is held as trading stock - Possibly for the new land but maybe not the existing house / land
    3. Land / property sold is ordinary income

    2+3 have almost identical outcomes but a key difference with trading stock is when the sale is recognised for tax purposes.

    The developer toolkit attached provides some detailed general information which can assist when you obtain advice so that you understand the key concepts
     

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  5. Luca

    Luca Well-Known Member

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    Thanks, didn`t know that, always heard about buying, subdividing and selling the "back" and it looked like an easy process. So does this apply even if you have a transaction every let`s say 2 years? I can understand if you have multiple transactions in a year but if you have one here an there are you still falling under "enterprise"? Case 2 looks pretty straight forward (under my inexperienced eyes :) ), buy a lot with the intention to build and after 1 year you change your mind and decide to sell it, one off.
     
    Last edited: 7th Dec, 2017
  6. Terry_w

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

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    The tax outcome doesn't make the process easier or harder. Land can be on revenue account even with one transaction. It might be an isolated transaction.
     
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  7. Paul@PAS

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

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    The frequency of sale may indicate a trading stock issue in the nature of a busienss (or not) on revenue account v's say a isolated sale which may be on revenue account as a profit making intention / isolated transaction - Not trading account but still revenue basis. Profit making intention has no requirement whatsoever for repetition. Ditto an enterprise need not have any repetition.

    A example of a sale that may be a CGT event and not a GST supply may be Mary and Dave who buy land planning to marry. They build a new home and then on the bucks night Fred does something naughty and they bust up and sell. The asset is a CGT asset but never a main residence if they didnt live there. So its taxable under CGT rules. No enterprise exists and the sale is said to be a mere realisation - A CGT event. No GST either as no enterprise.

    Its important to remember that CGT started in the 1980s and for years and years prior to this the rules were always and have been the same. Income tax has always applied to profit making intentions. Its just many taxpayers think CGT means less tax. Many transactions are "income" and never a CGT issue.

    This is what years of education, experience and qualifications in tax develops. Its not simple and there are loads of traps.
     
  8. Mike A

    Mike A Well-Known Member

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    But if Dave and Mary were defacto they may be able to use the marriage breakdown rollover provisions.

    Im more concerned that dave and mary are getting married and then fred does something naughty so they break up. This a threesome ? Polygymists ? Definitely some legal and tax advice needed in their case.
     
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  9. Luca

    Luca Well-Known Member

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    Thanks guys, are we sure Mary didn`t have a big property portfolio ;-)
     
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  10. Mike A

    Mike A Well-Known Member

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    Good point lets hope mary had a binding financial agreement :p