CGT obligation on sale blocks subdivision

[SilverEagle]

Hi guys i'm new to the forum and am really enjoying the excellent advice and information on the various topics presented.
So a big thanks to everyone because i have learned so much already!

I own a corner block with a House(PPOR) up front of approx 940sq metres

I have subdivided the bock into 3 sections retaining the existing house on one(481sq metres) and have created two new titles for the remaining 2 blocks.

Purchase price for the original house(PPOR) and block in 2005 was $357,000+stamp duty of$16,420.
subdivision plan costs $25,000(architect costs+VCAT costs)
Council contribution costs for open land space $19,800 for approval of overall subdivision.
Annual income $50,000 pa
Potential sales price per block $250,000
Agents fees approx $8000
Selling legal fees approx $3000
I would like to sell the two rear blocks and pay down my mortgage $400,000
to become debt free.
My question relates to my CGT obligation
My partner works in my business and draws no wage.
How much CGT approx ball park figure would i be liable for upon sale of the two blocks?
Thanks
SilverEagle

 

[Aaron_C]

You should read this page: http://www.ato.gov.au/corporate/content.aspx?doc=/content/86198.htm

Your cost base will be 459/940 of the total cost because that's the proportion of the new blocks of land.

 

[SilverEagle]

Thanks Aron for the fast reply will grab a coffee and do now

Cheers
SilverEagle

 

[SilverEagle]

Ok my calculations came to around $40,000 CGT obligation using an effective tax rate of 38%.
My choices were build two units on these blocks or sell as is with plans but as all the indicators in our industry are coming in negative for the next 12 months i'm going to play it safe and cop the CGT hit.

SilverEagle

 

[Aaron_C]

Where are these blocks located?

 

[dantro]

Aaron you've apportioned the 459/ 940 based on land m2 area but the article you linked implies that the apportionment should be done on value which could be materially different - eg those 2 new lots could be worth a fair bit more than just half the total site value. If that was the case, a greater portion of cost base costs could be claimed.

 

[SilverEagle]

Blocks are located in Carrum 3197
Sorry the 459/940 went over my head,what was that referring to?
Thanks mate,just got back from snapper fishing.4 pinkies down
Cheers
SilverEagle

 

[dantro]

The sale price minus cost base (for the proportion of land being sold) is going to determine your CGT.

Aaron's helpful link mentioned that the proportion is determined by the relative value.

481m2 (existing house) + 459m2 (the other two lots) = 940m2 (total land)

The question is how to work out the proportions since the more that the cost base can be attributed to the land being sold, the less your CGT will be.

e.g. if you're basing it on land size then 459/ 940 x total cost base is your figure.

My point was that the ATO link mentioned that the proportioning is based on land value (not necessarily land size). So if the land 'value' of those two newly created lots is greater than 459/ 940 (e.g. 2/3 or even 1/2), then your CGT will be less.

I'm in a similar situation, trying to work out how to apportion the cost base portions for the lots that I may sell on a 4 lot subdivision. A small difference in assumed value can make a significant difference in the CGT. E.g. if I went on land size and sold the front unit, that's almost 40% of cost base vs going on land value (30% of cost base). As the cost base will be well over $1M, this can make quite a difference in the amount of tax paid.

 

[SilverEagle]

Thanks Dantro,got it.I was trying to use a $$ value to that ratio and not land size.
I read the link to refer to value of apportioned blocks wether right or wrong.
Dantro i would be really interested in your apportioning figures so i can run a comparable example against mine.If i can save thousands then i'm all for it.
Thanks for the input Aron_C and Dantro~Much appreciated.
I'll run all my figures past my accountant in the end but even accountants can miss avenues of reduction.
Regards
SilverEagle

 

[Tillie]

The topic is interesting.

SilverEagle has a house on one of the blocks. If original cost base is divided based on land size only the value of the house is ignored. Is this right?

 

[DrRudi]

You're right Tillie. The block with the house would be attributed a far higher cost base than each of the two subdivided blocks.

This is how I've addressed this matter in the past (with an example):

January 2007 - January 2011: Whole lot was main residence.
January 2011: Subdivision approved and lots created
January 2012: Lots sold

Cost base of whole block + house was $400,000.

MV individually at the time would have been $250,000 for house on 481 sqm and $125,000 for each lot.

Hence as a proportion of the cost base the 2 rear lots individually would have been 50% of the cost, i.e. cost base of $100,000 each.

Thus capital gain of $150,000 ($250,000 proceeds - $100,000 cost base).

BUT for the first 4 years of ownership the lots 'didn't exist' - they were part of your main residence.

Hence apportioning the gain: $150,000 x 1 / 5 years = $30,000 each.

50% CGT discount = $15,000 each taxable

CGT = ~$13,000 in total based on 38.5% tax rate

Perhaps that is a bit simplistic but you get my drift. I recommend talking to your accountant though

 

[DrRudi]

BTW I'm pushing the boundaries with what I said re apportioning for time - some would argue that is not correct as you have owned the land the whole time - I guess I'm more willing to take the risk.

 

[dantro]

DrRudi,

Thanks for sharing those figures, but I don't understand how you arrived at a capital gain of 150k.

Shouldn't it be:
Capital gain = 125k (amount sold for each lot) - 100k (assuming 25% apportionment for each lot) = 25k each
i.e. total of 50k capital gain (not 150k as you calculated)

Also, the ATO link that Aaron provided mentions that the apportionment should be done on land value (by subtracting the house value), so shouldn't you have taken the 400k (purchase price for the house and land) and subtracted that value of the house 400k - $x and then apportioned the relative land values?

The ATO link also doesn't mention anything about being able to reduce tax according to time. Have you got any links or evidence that this is legitimate?

Thanks.

 

[DrRudi]

DrRudi,

Thanks for sharing those figures, but I don't understand how you arrived at a capital gain of 150k.

Shouldn't it be:
Capital gain = 125k (amount sold for each lot) - 100k (assuming 25% apportionment for each lot) = 25k each
i.e. total of 50k capital gain (not 150k as you calculated)

Also, the ATO link that Aaron provided mentions that the apportionment should be done on land value (by subtracting the house value), so shouldn't you have taken the 400k (purchase price for the house and land) and subtracted that value of the house 400k - $x and then apportioned the relative land values?

The ATO link also doesn't mention anything about being able to reduce tax according to time. Have you got any links or evidence that this is legitimate?

Thanks.

Sorry for the late reply.

The OP said the lots will sell for $250,000 each - so that's where my $150,000 has come from.

Re the link provided - I could argue I got the same result from applying different logic. Say the house was dilapidated (sp?) and worth next to $nil. I've allocated $125,000 market value to the two rear blocks (240 sqm each), $240,000 to the land the house is on and $10,000 to the house itself = $500,000. If the cost base was $400,000, less cost of the house = $390,000, 240 sqm / 940 sqm = ~$100,000 each. Hopefully that makes sense.

Re the reduction of tax over time - I'm a little more risky than others on the matter - the ATO will advise something that favours them, rather than reality. So no

I.e. see the attached link - http://www.ato.gov.au/corporate/content.aspx?doc=/content/86198.htm - allocating costs on a reasonable basis, such as 50% of the subdivision costs and planning. I'd argue you had to incur 100% of those costs to create the lot to sell.

 

[Rob G.]

A couple of points:

Street frontage blocks usually have a higher value than rear subdivisions.

If you were to demolish the house that would push the house and demolition cost into the land. If you did that prior to subdivision then the rear block cost bases night increase proportionately. Of course to maintain your main residence, you would need to build and occupy within 4 years.

A 'reasonable basis' of apportioning other than area would require a qualified valuer if you want to avoid penalties on any subsequent tax audit that does not go your way.

Cheers,

Rob