Correct way to pay for subdivision

[albanga]

Hey All,
A while back I had asked a question about financing a development to hold and mentioned I had paid about 8k from my own savings for plans and permits. I was informed this was not a wise thing to do as if it were a loan then I could claim the interest as a tax deduction.

Well my situation has again changed and now instead of developing and holding the property we are simply going to sell the subdivided vacant land.

So I have two questions. Firstly is the fact I paid from savings for plans and permits now irrelevant because if I am no longer holding I cannot claim the tax deductions?

Secondly before I sell the vacant block I need to get it ready for sale by subdividing the land and everything that goes along with that. I anticipate it may be around another 10k. So what is the best way to go about paying for this? Given I am not holding do i just again use my savings or should I be looking into something else?

Thanks in advance

 

[Paul@PFI]

It would add to the cost base or to the value of the trading stock. The costs are not lost. The issue is have you conducted an enterprise ? This will determine if the sale of land may be subject to GST and also subject to ordinary income tax. The more you do to subdivide the more likely GST applies.

Its important to know the outcome of that issue before you sell or offer a contract so the contract complies. If you assume incorrectly you lose the margin scheme and GST could be 9% of the sale price. If you can use the MS the GST may be trivial. Sometimes its better to face it head on and avoid a concern.

The issue of how it is paid for just affects the profit. The interest will reduce the profit. Its immaterial...In 12 months the difference if its deductible is $500 max. Impact on assessment max $250. Negotiating a good REA or selling privately may save much more.

 

[albanga]

Hey Paul,
Thanks for the quick reply, but I must say most of that has gone over my head.
When you say "conducted an enterprise" are you referring to the structure? If so then the property is a joint ownership between my brother and I (50/50). As previously stated thus far 8k has been paid for plans, permits and engineering.

I have had two real estate agents value the subdivided land based on these plans and the value is around 270k.

The goal of my brother and I is to subdivide this land and sell. Once settled I will then purchase my brother out of the existing property (value is around 450k).

This current property (non subdivided) is both our PPOR. I have lived in it since settlement and my brother is now renting but lived in it for 18 months when settled so not sure how this affects GST.

When you say "Impact on Assessment" is this something your business deals with?

 

[Paul@PFI]

No MT 2006/1 explains the entity is not usually relevant to enterprise but may be. For example a trading company cant argue its has no profit motive but a not for profit is different. eg AV Jennings selling a house and land pkg is subject to GST. The Catholic Church selling a surplus block may not be.

The enterprise is how you conduct affairs. Organisation, plans, permits etc may be examples. Bank Accts etc. Repetition is NOT important. An examp[le of entity is your apparent partnership but the ruling considers that you don't have to form an entity to have an enterprise. An example can be a JV. Its not an entity. Its an enterprise. WHY are you both doing it ??? Is profit a motive ? If so its likely a enterprise or preliminary to an enterprise. Your joint intent is key. And the ATO looks at DA apps etc for that intent if they don't agree with your views later. Read MT 2006/1 and you may understand what I mean.

Impact on assessment means the end result when you lodge a return. Ideally you should know what those numbers are BEFORE doing anything. Its part of planning for all activities. Profit or not. You don't want to get to the end and somebody says - There is GST here. You also need to have a budget and stick to it. Tax in the budget that is neither too much or not enough.

If its been your PPOR that doesn't mean its tax free. Big mistake to assume that. The MR exemption is lost on subdivision. You also cant have a MR that is just land.

 

[albanga]

No MT 2006/1 explains the entity is not usually relevant to enterprise but may be. For example a trading company cant argue its has no profit motive but a not for profit is different. eg AV Jennings selling a house and land pkg is subject to GST. The Catholic Church selling a surplus block may not be.

The enterprise is how you conduct affairs. Organisation, plans, permits etc may be examples. Bank Accts etc. Repetition is NOT important. An examp[le of entity is your apparent partnership but the ruling considers that you don't have to form an entity to have an enterprise. An example can be a JV. Its not an entity. Its an enterprise. WHY are you both doing it ??? Is profit a motive ? If so its likely a enterprise or preliminary to an enterprise. Your joint intent is key. And the ATO looks at DA apps etc for that intent if they don't agree with your views later. Read MT 2006/1 and you may understand what I mean.

Impact on assessment means the end result when you lodge a return. Ideally you should know what those numbers are BEFORE doing anything. Its part of planning for all activities. Profit or not. You don't want to get to the end and somebody says - There is GST here. You also need to have a budget and stick to it. Tax in the budget that is neither too much or not enough.

If its been your PPOR that doesn't mean its tax free. Big mistake to assume that. The MR exemption is lost on subdivision. You also cant have a MR that is just land.

Thanks Paul, this does make much more sense. From what I am reading it seems a very grey area and I imagine makes your job very complicated when dealing with this area.

When you say "The MR exemption is lost on subdivision" are you referring to the entire block or the new parcel. I was under the impression it is just the new parcel whilst the existing one with the dwelling would remain as the MR.

 

[Terry_w]

albanga you should also consider that things change, so even though you may be intending to sell now you may end up keeping longer than expected.

 

[albanga]

albanga you should also consider that things change, so even though you may be intending to sell now you may end up keeping longer than expected.

If you have seen a number of my posts you will probably have noticed there is A LOT of that going on. I think in the past 3 months I have contemplated every possible scenario for this property.

 

[Paul@PFI]

Thanks Paul, this does make much more sense. From what I am reading it seems a very grey area and I imagine makes your job very complicated when dealing with this area.

When you say "The MR exemption is lost on subdivision" are you referring to the entire block or the new parcel. I was under the impression it is just the new parcel whilst the existing one with the dwelling would remain as the MR.

Correct... the MR continues on the smaller lot being occupied. The asset is effectively split and ceases MR exemption. If you have 1400m2 and sub div into two 700m2 block then the MR exemption only applies to 700m2 that you reside in.