CGT and parnership split

[NBS]

Just a question.

If I buy a property in partnership with wife was planning to buy reno and sell.

Purchase $170000
Legal - stamps - selling costs and reno etc end amount $200000
Sell within 12 mths $240000

As the $40000 will be Isubject to CGT I was looking at a partnership split of 5 / 95 in wifes favour.

5/95
IE $2000 - $38000

Tax on $2000 - $740 @ 37c

Tax $38000
0 - $18200 = 0
18201 - 37000 = 3571
37001 - 80000 = 325

Tax payable = $ 4636.00

50 / 50 split
Tax 20000 = $7400
Tax wife 20000 = $342

Tax payable = $7742.00

Just a little extract from ATO site

When you acquire a CGT asset, you need to start keeping records immediately because you might have to pay tax on it in the future. Your records will help ensure you don't pay more tax than necessary. If you own the asset jointly with someone else, you'll need to establish each owner's share.[/I]

How best / easiest to set this up a partnership with a 5 / 95, I would assume a legal agreement needs to be set in place.

The difference is a bit over $3100 dollars so means a lot in the bottom line.

Brian

 

[Aaron_C]

The simplest way would be to go is to buy it in a 95%/5% tenants in common split. No need for a partnership.

 

[Terry_w]

If it is a quick buy and sell then consider using a discretionary trust so that the income can be flexibly distributed to the lowest income earner at the trustee's discretion.

 

[coastymike]

Agreed with Terry. usually cost of setup is a major drawback but I know terry is establishing discretionary trusts with a corporate trustee for $1,500 plus GST so it might be worth considering.

 

[coastymike]

Also be aware that as it sounds like you may be doing a substantial renovation then the sale will be subject to GST. And no not confusing this with CGT.

 

[NBS]

I would not class it as a major reno. The place has no kitchen and the bathroom / toilet needs replacing and a paint job inside as who ever did it should not pick up a brush or roller EVER.

I would not have considered GST as part of this as its basically cosmetic reno between $10000 and $15000

Trust seems the easiest way for distribution split.

Thanks
Brian

 

[Terry_w]

I think Coasty was alluding to s40-75 of the GST Act which indicates GST may apply to a sale if the property had been substantially renovated.

Substantial Renovations are defined under s195-1 as
"substantial renovations" of a building are renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

 

[coastymike]

yep that is the one terry but agreed if not substantial then no issue.

 

[Rob G.]

Joint ownership is a partnership ... for tax purposes.

Cheers,

Rob

 

[NBS]

So if I purchase the property in our joint names IE husband and wife.

Example figures only
Purchase cost $170000
Stamp duty, legals, selling costs, holding costs etc etc. $15000
Let say its classed as a substanial reno for ATO purpose of $20000

Completed project $205000

Selling price is $250000

Monies before tax $45000 CGT to be paid

Which part are you saying is GST required to be paid the "reno cost" or the "selling price"?

If on selling price that $25000 in GST plus let say $5000 in CGT a tax bill of $30000?

If GST payable it should be claimable back from the ATO.

Brian

 

[Terry_w]

If GST was applicable it would generally be on the sale price. Not sure if the margin scheme could apply.

 

[coastymike]

http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR20033/NAT/ATO/00001

GSTR 2003/3 covers it nicely. Paragraphs 53 - 80 cover the concept of substantial renovations and what constitutes a substantial renovation.

 

[NBS]

Coastymike - now that was a read and a half and an eye opener for sure. Hard to really get a handle on it so will have to print it out and kill a few hours. The 5 year rule was also interesting.

Reading what is classed as substantial renovations and non substantial renovation. I'm pleased to say mine will come under non substantial renovation. Of course a couple of other things popped up in the read so a visit to the accountant JUST to ensure before I put an offer in on this property I'm not walking up a loaded gun (so to speak).

Just reading a few of the paragrapths I dare say many people would be caught doing renovation and not realising it comes under substantial renovation by the ATO. Only to get a rude shock down the track at some stage.

Brian

 

[coastymike]

Agreed NBS. You are doing the right thing by going and discussing with your accountant. Others find out during audit and in for a rude shock. But fortunately they saved $200-$300 on the consultation fee with the accountant which can then be used to pay the penalties and interest and tax which probably amounts to thousands or tens of thousands.