cost base of units for CGT

[perthguy]

I will be seeking proper tax accounting advice before I make any decisions. I'm just trying to get a feel for the concepts and issues before I talk to my tax accountant.

I am looking at three unit site with a retainable, rentable house (at least in the short term).

My plan is to develop the block over time in 2 stages.

Stage 1 is to divide the block into two: one at the back (lot 2) and a duplex block at the front (lot 1) with the rentable house. My idea is to build a house on the back block to live in long term as my PPoR (unit 3).

Stage 2 down the track is to demolish the house and build two units (on lot 1) to rent out and keep long term (unit 1 and unit 2).

My question relates to capital gains tax for the front two units. Eventually, I will sell the front units. For each unit, how is the 'cost base' calculated?

According to the ATO, you work out your capital gain or capital loss by subtracting your 'cost base' (what it cost you to get the asset) from your 'capital proceeds' (what you received when you disposed of it).

I am trying to get the concept of calculating the cost base for unit 1 and the cost base for unit 2.

After stage one, I will have two lots. Will the cost base for lot 1 be a % of the purchase price, plus a % of the purchase costs, plus a % of the subdivision costs? I was thinking maybe I could apportion 70% of costs to lot 1 and 30% to lot 2. Or, do I have to have a valuer make a determination as to how to apportion the costs (percentage wise)? Or, do I create the blocks and then have them valued and use the valuation as the basis for determining the percentage?

Also, are there any tax implications to think about with building a PPoR on lot 2 and living in it long term?

 

[perthguy]

I have done some more digging and this is what the ATO says:

The date you acquired the subdivided blocks is the date you acquired the original parcel of land and the cost base of the original land is divided between the subdivided blocks on a reasonable basis.

For information on what is considered 'a reasonable basis', see TD 97/3

TD 97/3 states:

4. If an original land parcel is split into two or more blocks, and you are the beneficial owner of the original land parcel and each of the new blocks, section 112-25 provides that each element of the cost base and reduced cost base of the original asset (worked out at the time of the split) is apportioned in a reasonable way and included in the corresponding element of the cost base and reduced cost base of each new asset.

Note : In determining, for the purposes of section 112-25, the extent to which it is reasonable to attribute each element of the cost base and reduced cost base of the original land to the corresponding element of the cost base and reduced cost base of each new block, we would accept any approach that is appropriate in the circumstances of the particular case, e.g., on an area basis or relative market value basis.

http://www.ato.gov.au/General/Capit...eal-estate/Subdividing-and-amalgamating-land/

http://law.ato.gov.au/atolaw/view.htm?DocID=TXD/TD973/NAT/ATO/00001

So, the answer is that cost base is to be determined on a reasonable basis. I think it would be reasonable to have the blocks valued and use that as a basis for apportioning costs on a percentage basis for each lot relative to the value of the lot.

 

[coastymike]

That apportionment would sound reasonable.

Given your original intentions however it sounds like a profit from an isolated transaction and capital gains wont be relevant as the profit would be assessed on revenue account.

 

[perthguy]

I think I found something that may help:

http://www.13wentworthselbornechambers.com.au/barlinpdfs/partitioninglandaugust2010.pdf

It appears such a transaction may be a CGT event: "This rearrangement and reallocation of the ownership of CGT assets constitutes a disposition of the CGT asset, and is therefore a CGT event"

but this is the bit that alarms me: "The owner will also acquire their new interest, being the interest disposed of by the other co-owner, for market value. This further interest will be a separate CGT asset than the initial interest held (see Taxation Determination TD 45)."

It looks like my first share in the block will be a separate CGT asset to my new share (further interest). That doesn't sound like it will fit with my idea of making the house on Lot 2 my PPoR.

The article suggests forward planning to address the CGT issues by using a 'bare trust'. "If the co-owners enter into a deed whereby they acknowledge that the land is to be held on bare trust for the benefit of each other in accordance with the proposed plan of subdivision each co-owner will hold their interest in the other co-owners post-partition lot on bare trust for that other co-owner." This looks like it could address the problem but I would want the lots to be held by the individuals, not the bare trust at the end of the process

 

[Terry_w]

I think I found something that may help:

http://www.13wentworthselbornechambers.com.au/barlinpdfs/partitioninglandaugust2010.pdf

It appears such a transaction may be a CGT event: "This rearrangement and reallocation of the ownership of CGT assets constitutes a disposition of the CGT asset, and is therefore a CGT event"

but this is the bit that alarms me: "The owner will also acquire their new interest, being the interest disposed of by the other co-owner, for market value. This further interest will be a separate CGT asset than the initial interest held (see Taxation Determination TD 45)."

It looks like my first share in the block will be a separate CGT asset to my new share (further interest). That doesn't sound like it will fit with my idea of making the house on Lot 2 my PPoR.

The article suggests forward planning to address the CGT issues by using a 'bare trust'. "If the co-owners enter into a deed whereby they acknowledge that the land is to be held on bare trust for the benefit of each other in accordance with the proposed plan of subdivision each co-owner will hold their interest in the other co-owners post-partition lot on bare trust for that other co-owner." This looks like it could address the problem but I would want the lots to be held by the individuals, not the bare trust at the end of the process

This can be incorporated into the deed of partition.

 

[perthguy]

This can be incorporated into the deed of partition.

That sounds promising. For best advice, would you recommend a specialist solicitor or a specialist tax accountant?

I need to find out the best structure to achieve my goals and then if a deed of partition is required, I would need someone to prepare that for me.

 

[Terry_w]

That sounds promising. For best advice, would you recommend a specialist solicitor or a specialist tax accountant?

I need to find out the best structure to achieve my goals and then if a deed of partition is required, I would need someone to prepare that for me.

The deed is legal work, but it may be a good idea to speak to your accountant first to work out a few things and then get the lawyer to draw up any documents needed.

 

[perthguy]

The deed is legal work, but it may be a good idea to speak to your accountant first to work out a few things and then get the lawyer to draw up any documents needed.

Will do. Thanks for your time on this. Much appreciated. It looks like I have some meetings to set up and will advise of the outcome.