CGT and subdivision

[devo76]

Hi all. Just thinking about how any future CGT is proportioned when you subdivide and build.

EG with some rubbery figures.

Purchase price $400,000

New house built and subdivided and valued at completion $400,000
( actual total cost to sub and build is $200,000)

Existing house revalued at $380,000

What would you pay in tax if both sold for $700,000 each in 10 years time

Cheers.

 

[Aaron_C]

Capital Gain = Capital Proceeds - Cost Base.
Capital Proceeds = $1.4m (2 x $700,000)
Capital Cost = $400,000 + $200,000 + holding costs = $600,000+

Capital gain = $800,000, taxed at your marginal rate.

 

[devo76]

Capital Gain = Capital Proceeds - Cost Base.
Capital Proceeds = $1.4m (2 x $700,000)
Capital Cost = $400,000 + $200,000 + holding costs = $600,000+

Capital gain = $800,000, taxed at your marginal rate.

So why is a valuation of both properties required at completion ?

Both will be rented by the way with original house rented since purchase.

 

[Aaron_C]

A valuation at completion may be required for several reasons...

a) A bank valuation if you are going for a construction loan.
b) If you are using the margin scheme, to calculate the GST payable when you have completed the construction and want to rent out the property.

 

[coastymike]

Aaron

If you claimed input tax credits along the way and the purpose changed then not sure why you would need valuation as a gst adjustment would be required but a valuation would not affect the gst adjustment.

 

[Aaron_C]

Well I'm not sure how the OP intends to do it. If he is just doing it as a 'once off' thing then he won't need to pay GST on the sale of the properties anyway - so the margin scheme is a moot point.

However, if he does intend to undertake the project as an 'enterprise' (and hence claim back GST credits on any purchase related to the development) then a valuation is indeed very important upon completion. Once he starts renting out the property after it is built, the property ceases to be a taxable supply and is input taxed instead. At that stage, a valuation is required to value the GST component of the new property that is now payable to the government (possibly using the margin scheme).

 

[coastymike]

Read division 129 of the gst act this is not how gst adjustments work. The margin scheme only applies on sale not to a change of creditable purpose

Gst will be applicable is he sells these new properties within 5 years of completion

 

[Aaron_C]

Well like I said if he's just going for a once-off development then GST isn't an issue for him.

 

[coastymike]

I disagree just because he is doing a once off development doesnt mean gst wont apply. You need to consider the 5 year rule for new residential premises. At any rate the advice you have given re a valuation and division 129 adjustments is not correct.

 

[Aaron_C]

I never gave advice on Division 129 adjustments. He asked why a valuation would be necessary - and I've told him that it's most commonly for bank finance (whether it's a commercial development or not). In the absence of more information there's no need to go into whether his purpose has changed/remained the same. That's where his tax lawyer comes into play. But you are right about the margin-scheme only applying to sales - my mistake.

 

[coastymike]

Aaron

These sort of things annoy me because you said in your post that he needs a valuation not only for a bank valuation but also to calculate gst payable using the margin scheme when he sold the property and he instead started renting them out. It is point 2 that is wrong.

Just admit you are wrong. Nothing wrong with that. You arent experienced in tax law and i wouldnt expect you to. Covering up your errors by stating you didnt say something you did is poor form. I am asuming you are young as young people in business frequently do this rather than putting up their hand and saying " hey guys oops made a mistake"

 

[coastymike]

Aaron thanks you edited your post as i was posting. All good we all make mistakes. Myself included

 

[devo76]

I will be renting both long term. No special structuring re GTS.

I ask because my accountant made a passing comment that I need valuations.

I was going to anyway as I'm sure they will be needed to separate the security of both properties.

Just wondering why my accountant wants them.

Cheers

 

[Aaron_C]

I don't know about your accountant, but the bank will be the one who will need valuations for sure.