CGT 50% discount

[Legs]

Hi

OK
Bought a block of land, settlement 30/06/09
Building house, finish building 5/12/09

When can i sell and and recieve the CGT 50% discount?

Is it from date of contract signing of the block?

We can build houses in our area, coastal retirement, holiday area and sell them $50k-$75k great than cost, totally fitted out...

Considering doing it in the Missus' name over and over while it stays this way as she may not earn a wage in the future.

 

[AUSPROP...]

suggest do some reading here www.bantacs.com.au - see the booklet called 'how not to be a developer'.

sounds likely that you will never be eligible for the CGT discount and you should register for GST

 

[Legs]

suggest do some reading here www.bantacs.com.au - see the booklet called 'how not to be a developer'.

sounds likely that you will never be eligible for the CGT discount and you should register for GST

Correct me if i'm wrong but if i buy an existing property and sell it within 12mth i have to pay CGT on it.

However if i hold it more than 12 mths you get a 50% CGT discount on it?

If so whats the difference between buying an existing prop and building?? Thats why i need to know when it is calculated from..the contract date or settlement date..

 

[AUSPROP...]

Correct me if i'm wrong but if i buy an existing property and sell it within 12mth i have to pay CGT on it.

However if i hold it more than 12 mths you get a 50% CGT discount on it?

If so whats the difference between buying an existing prop and building?? Thats why i need to know when it is calculated from..the contract date or settlement date..

the answer for existing building is the contract date, however, you are not involved in a passive purchase here. You are engaged in an enterprise, your turnover exceeds the threshold to register for GST and your sale is considered to be a revenue item not a capital item. only capital items are subject to capital gains tax. revenue items are subject to income tax. One key point is, your new home meets the definition of 'new residential premises' as defined by the GST legislation.

I am not relaying this to ruin your long weekend.... I wish it weren't the case as it costs me a packet. Seriously - read that booklet, it's all there

 

[Legs]

the answer for existing building is the contract date, however, you are not involved in a passive purchase here. You are engaged in an enterprise, your turnover exceeds the threshold to register for GST and your sale is considered to be a revenue item not a capital item. only capital items are subject to capital gains tax. revenue items are subject to income tax. One key point is, your new home meets the definition of 'new residential premises' as defined by the GST legislation.

I am not relaying this to ruin your long weekend.... I wish it weren't the case as it costs me a packet. Seriously - read that booklet, it's all there

my turnover exceeds the threshold to register for GST??? what does that mean? are you saying i have to register for GST because of the turnover, because i am making too much profit by doing this in a single year?

Isn't "new residential premises" your Principle place of residence not an IP, i should have stressed this is not our principle place of residence..it will have short term tennants in it.

thanks for your help...it is vital as i am new to this..

 

[TheDoctor]

To explain what I believe Ausprop means in more details (correct me if I'm wrong).

By the sounds of the facts you have presented, you are/have planning to buy a block of land, build a house and sell it straight of way. If that is the case, for tax purposes you are "in the business of developing and selling houses". In which case all expenses in relation to the purchase and building are business expenses (and deductible in the year they're occured) and all income is business revenue. As business revenue is NOT CGT, you can't get any CGT discount.

As the income is business revenue (and will be over $75,000 in revenue) you were/are required to register for GST and pay GST.

This treatment is different than if you built the house and then rented it out as the building would then be 'capital'. In which case all the costs of building and purchase would form part of your CGT cost base and when you EVENTUALLY sell the property, you will pay CGTon it.

 

[Legs]

To explain what I believe Ausprop means in more details (correct me if I'm wrong).

By the sounds of the facts you have presented, you are/have planning to buy a block of land, build a house and sell it straight of way. If that is the case, for tax purposes you are "in the business of developing and selling houses". In which case all expenses in relation to the purchase and building are business expenses (and deductible in the year they're occured) and all income is business revenue. As business revenue is NOT CGT, you can't get any CGT discount.

As the income is business revenue (and will be over $75,000 in revenue) you were/are required to register for GST and pay GST.

This treatment is different than if you built the house and then rented it out as the building would then be 'capital'. In which case all the costs of building and purchase would form part of your CGT cost base and when you EVENTUALLY sell the property, you will pay CGTon it.

If you read my previous post it says i am putting tennants into it, sorry for not stating that earlier..

Does the ATO have a minimum time it must be tennanted for?

 

[TheDoctor]

Sorry, I did not realise you were tenanting the property. I took "We can build houses in our area, coastal retirement, holiday area and sell them $50k-$75k great than cost, totally fitted out..." as meaning you plan on building and selling.

If you are building and then renting out the property (assuming it isnt just a "filler" until you can sell with the discount), the CGT treatment is as follows.

For CGT purposes you have 2 seperate assets.

1) The land - The purchase date being the signing of the contract

2) The building - The purchase date being when you first STARTED to build the house (not the completion date). This is why when Capital Gains Tax was first introduced in September 1985, there was a huge rush with people wanting to start building their houses before then so it was pre-CGT.

When the property is eventually sold, any capital gains would then be apportioned between the two CGT assets. In order for the 50% discount to apply to both assets, the property would have to be sold greater than 12months after when you started building.

 

[Legs]

Just for some extra info (although would not apply given the facts). Lets just say you bought the land, built the property and then proceded to rent it out. For CGT purposes you have 2 seperate assets.

1) The land - The purchase date being the signing of the contract

2) The building - The purchase date being when you first STARTED to build the house (not the completion date). This is why when Capital Gains Tax was first introduced in September 1985, there was a huge rush with people wanting to start building their houses before then so it was pre-CGT.

When the property is eventually sold, any capital gains would then be apportioned between the two CGT assets.

However, as started in my above post, based on your facts you are running a "property development business" and thus all income and costs are business income/expenses and no CGT (and thus no 50% discount) is applicable.

Funny that, as i just spoke to the ATO and they said it is purely from the date of contract your signed for the land...not two separate items..i.e. house and land.

Once again ... it will be tennanted

 

[TheDoctor]

Legally speaking the house and building are seperate CGT assets. There is a lot of case law backing this up.

As sad as it sounds, I try not to put much stock into what the ATO call centre people say.

 

[Rob G.]

If you read my previous post it says i am putting tennants into it, sorry for not stating that earlier..

Does the ATO have a minimum time it must be tennanted for?

No minumum time to be tenanted, they will look at the facts.

Your original intention to purchase, build and sell for a profit will be a strong indicator of an income activity.

Developers do not avoid GST by merely putting short term tenants in either.

Please pay for some specific advice before you kick off since the tax and compliance costs will eat into that nice $50k-$75k profit margin.

Cheers,

Rob

 

[AUSPROP...]

Please pay for some specific advice before you kick off since the tax and compliance costs will eat into that nice $50k-$75k profit margin.

Cheers,

Rob

best advice I think. To me, it seems you are still building to sell at a profit, hence GST, no CGT reduction etc.

however if your intentions are otherwise and you just happen to be realising your asset and you believe you can convince the ATO to think the same way then you will need to cover your bases

worst case scenario would be to not sell on the margin scheme and then be assessed for GST later = full 10% tax slug on your sales price

 

[coastymike]

Although not a property transaction the courts held in FCT v Myer Emporium that a one off transaction outside the ordinary course of business may be assessable income under section 6-5, no CGT discount applies, if the intention or purpose was to make a profit or gain from the transaction.

Look at TR 92/3 which discusses profits from isolated transactions. http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR923/NAT/ATO/00001

Seek a professional opinion based on the particular facts of your case.

 

[Legs]

So your trying to tell me every time i buy something for the house...say like a new A/C or carpet... it has to be depreciated from the date you bought it and a ratio for the whole year worked out?? You cant just depreciate for the whole TAX year 12mths the object was purchased during?

If the building process takes up to 6 mths how can they say you forked out all the expense from date of contract signing, therefore eligible from that date? I could sign a contract for the building process yet ask the builder to hold off work for 6 mths...

I cant see the difference.

 

[AUSPROP...]

the way it works is... and get professional advice but anyway....

* soft costs such as rates and interest are expensed
* hard costs are charged to your WIP
* you can claim any GST as applicable

At the end, GST is calculated as either per the margin scheme or just standard 10%.

If your land cost $100k, the build $100k ex GST, and you sell for $330k

then under normal GST calcs, its roughly $30k liability. the assessable profit is $100k

under the margin scheme, it's $330k-$100k = $230k / 11 = $20909 with an assessable profit of $109,091

All the stuff about depreciation only applies if your business is renting properties. So the fundamental question is, are you a developer or a rental property investor?

 

[Legs]

the way it works is... and get professional advice but anyway....

* soft costs such as rates and interest are expensed
* hard costs are charged to your WIP
* you can claim any GST as applicable

At the end, GST is calculated as either per the margin scheme or just standard 10%.

If your land cost $100k, the build $100k ex GST, and you sell for $330k

then under normal GST calcs, its roughly $30k liability. the assessable profit is $100k

under the margin scheme, it's $330k-$100k = $230k / 11 = $20909 with an assessable profit of $109,091

All the stuff about depreciation only applies if your business is renting properties. So the fundamental question is, are you a developer or a rental property investor?

They'll be no GST involved...purely rental investor that will move on property every 1-2yrs.. No problem with that I AM SURE.

 

[coastymike]

But you said "Considering doing it in the Missus' name over and over while it stays this way as she may not earn a wage in the future" Isn't there a profit making intention from the time of the original purchase ? Why would one do it over and over if it was the mere realisation of an investment asset ? Just questions to ponder as audit may ask the same.

 

[AUSPROP...]

yes just be careful. data matching real estate is easy and a she'll be right attitude could be costly. After you have moved on a couple of rentals there would certainly be a risk forming

 

[Legs]

But you said "Considering doing it in the Missus' name over and over while it stays this way as she may not earn a wage in the future" Isn't there a profit making intention from the time of the original purchase ? Why would one do it over and over if it was the mere realisation of an investment asset ? Just questions to ponder as audit may ask the same.

Over and over can mean 3 properties over 10 years.. i wouldn't see that as suspicious..and it could mean 210k over the 10 years.. if she becomes the homemaker it will be in her name for taxation reasons..

However as these properties increase it is quite possible I will just add to the portfolio and keep the previous properties.. its a booming area and as long as the seachange demand continues, these houses will be prime real estate.

"Isn't there a profit making intention from the time of the original purchase ? "

I ask you, who buys property NOT to make a porfit?????

 

[TheDoctor]

I ask you, who buys property NOT to make a porfit?????

Most people buy property in order to make "Capital gains" and not for the purpose of making a 'profit' (read: business profit) on the sale of the property.