Developers - CGT on a Dev

[Paul@PFI]

One of the common issues I disagree with here is investors who later change their mind and subdivide and build then sell some of their investment.

They ask questions about the capital gain they expect to make...I then have to explain that there might be no CGT. It might be fully assessable etc. No discount. Sometimes the trading stock rules do allow a capital gain but its complex. Then there could be GST too. They seem very surprised and often some disagreement ensues....

Well its not just my view. Others say the same (Coastymike, Terry, GaryT RobG....) Now lets add another name "The Deputy Commissioner of Taxation"...

The ATO issued a Tax Alert (TA 2014/1) a few days back. It concerns artificial arrangements that are being used to try to farm off some of the profits from a development and call it a capital gain...By using a unit trust. This is a old trick and its very weak. The apparent scheme is based on the redemption of units being a CGT event v's that of the profits and the land etc.

The message is that interposing a unit trust (or other forms of special trusts such as a hybrid) to enable an apparent profit to be classified on capital account wont fly. Not without a dispute. And 75% penalties.

1. Developing is a business
2. If its not a business then the profit making intent may bypass the CGT provisions and still deal with ordinary income...ie no CGT discount.

 

[westminster]

Very true words Paul.

People also can't assume because something is in personal name or they don't do it very often or it's under a certain amount doesn't make them a developer either.

I have a mixture of investments plus developments so it gets a little tricky but I aim to always stay on the right side of the ATO and not try and incur their wrath by being dodgy

 

[Terry_w]

Here is the ATO media release
https://www.ato.gov.au/Media-centre/Media-releases/ATO-warns-property-developers-to-declare-income/

 

[Nattl3s]

So whats defined as a development/ being a developer?
You already have a PPOR and you:

- Buy land, build house, sell for profit.
- Buy block of land, split in 2, build/move and sell 2 houses.
- Buy land build townhouses etc

Or is it the length of time involved/ how long asset is held?
Cheers, nat

 

[Paul@PFI]

Good question Nat

Intention to make a profit (or to repay a loan using proceeds) by changing the land and/or assets upon it. Once is enough...Not even a regular activity. Don't need a ABN, a licence, etc.

Even your own home.... The MR exemption ends when you subdiv and create a new asset. Also "trading stock" gets created when your intent changes. Its a CGT event with two options. (market value or cost) At that time the cost gets split - one is MR and other not.
Time issues are irrelevant. They often get mention as a "CGT issue" of 12mths + by mistake.

YES = Revenue not CGT
NO = CGT

- Buy land, build house, sell for profit. YES + GST issue
- Buy block of land, split in 2, build/move and sell 2 houses. YES YES + GST + GST
- Buy land build townhouses etc YESYES +++++GST ++++++++

Buy land, build and sell some (YES) keep some for rental income (NO - Maybe)

In its simplest form I have seen your couples buy a house site, build and then bust up. Sell the site and there is no CGT.

 

[Rob G.]

You can be a developer by intent - e.g. purchase with intent to develop.

You can also be a developer by action - e.g. subdivide your existing investment in a commercial manner for profit by way of sale (aka profit making scheme)

The latter one is not clear cut due to lack of initial intent. All facts need to be weighed up.

 

[BLTN]

This is an interesting issue.

Just wondering Paul, what happens if you buy land, build multis (say 3-4 units) but hold them indefinitely (at least 5 years).

When you sell down the track (if you sell), is this revenue or CGT? I'm aware that you won't pay GST if you hold for more than 5 years (and are renting them out for that time).

EDIT: This section of the media release seems to suggest that this would be fine, and it would be CGT like any other IP:

"A growing number of property developers are using trusts to suggest a development is a capital asset to generate rental income and claim the 50 per cent capital gains discount."

 

[Paul@PFI]

BLTN Ahhh ...Thats what Rob mentioned....all the facts

If you proposed that the dev was on capital account I might recommend a private ruling.

The media release isn't binding and relates only to a trust. The income tests Rob mentioned must both be satisfied. The ATO can argue one or both.
http://law.ato.gov.au/atolaw/view.htm?DocID=TPA/TA20141/NAT/ATO/00001
Read Para 5 a. b & c....

Para 3 deals with the issue of intent. ATO are always happy to look at third party evidence such as a DA that includes the words sell, market, etc....Selling off the plan isn't a issue. Issues that can be red flags:
- Bank finance docs which suggest you will sell to reduce loan :-(
- Bank finance docs which suggest long term hold

I would imagine if you hold for a duration of 5 years its conclusive of capital account. If it were a block however the scale could be akin to a business.....revenue account.

Personal advice would be recommended.

 

[Nattl3s]

YES = Revenue not CGT
NO = CGT

- Buy land, build house, sell for profit. YES + GST issue
- Buy block of land, split in 2, build/move and sell 2 houses. YES YES + GST + GST
- Buy land build townhouses etc YESYES +++++GST ++++++++

Thanks Paul, wasn't aware of this at all and GST on top of it too. Certainly takes a bite of the profits. Cheers, nat

 

[Terry_w]

Thanks Paul, wasn't aware of this at all and GST on top of it too. Certainly takes a bite of the profits. Cheers, nat

Most budding developers are not aware of the various tax issues and some people seem afraid to spend a few hundred on some advice which could potentially save them tens of thousands in years to come.

 

[zxtc]

Very interesting as I was just looking into this as I might be selling a new house build instead of renting it out.

So if you buy land and build a new house then sell it before renting it out there is no CGT to be paid.
It is looked at as business/developer so you pay tax on the profit after sales at your current rate and have to pay GST at 1/11th of the sale price?

You can also claim back GST credits on the build?

Thanks Mick

 

[Paul@PFI]

Very interesting as I was just looking into this as I might be selling a new house build instead of renting it out.

So if you buy land and build a new house then sell it before renting it out there is no CGT to be paid. That's correct. NEVER a CGT issue.
It is looked at as business/developer so you pay tax on the profit after sales at your current rate and have to pay GST at 1/11th of the sale price? Hmmm...Even a one off by a homeowner may trigger a GST registration requirement doing a subdiv. You don't have to have a business to have a GST liability. Just an enterprise.....If its intended to make money (or reduce a loan debt) its likely to be an an enterprise if it involves a "supply".

You can also claim back GST credits on the build? Maybe...Not if the margin scheme was used. Do you have a valid tax invoice etc....GST can be claimed through the build (qtly or monthly) if the intent is to sell (ie sold off the plan is a no brainer). If its uncertain when / if the sale will occur the usual rule is don't claim anything but the potential GST is accounted for and apportioned across each build. When sold, the GST claim is made as a reduction in the GST paid on the sale.

ie 1/11th of sales price minus GST tax credit on build + agent sale etc etc


Thanks Mick

See above..Personal tax advice would be a good idea.

 

[Paul@PFI]

Thanks Paul, wasn't aware of this at all and GST on top of it too. Certainly takes a bite of the profits. Cheers, nat

Underpaying tax is as much a problem as overpaying tax.

 

[Jaggannath]

Most budding developers are not aware of the various tax issues and some people seem afraid to spend a few hundred on some advice which could potentially save them tens of thousands in years to come.

Agreed. I bought a property with no intent to develop (despite it being a large corner block), and it was suggested I consider developing. I looked into it, and asked an accountant, and when it was all explained to me I realised it was so much easier to just live in it, enjoy it, and then sell it for someone else to worry about.

 

[D.T.]

1) Buy and hold house IP in personal name
2) A couple of years down the track it gets rezoned, so create 2 titles and put these into trust's name
3) Build a house on each of the titles, keep one, sell one.

Stampduty, CGT, GST, etc?

 

[Blair007]

Agreed. I bought a property with no intent to develop (despite it being a large corner block), and it was suggested I consider developing. I looked into it, and asked an accountant, and when it was all explained to me I realised it was so much easier to just live in it, enjoy it, and then sell it for someone else to worry about.

If you can afford it financially then i think as terry w suggests paying an accountant a few hundred dollars for the right advice is a wise investment, especially when you a doing a property development worth hundreds of thousands. small price to pay...

If your block can be developed profitably then its something you should consider because with a good team and a buffer its really not that stressful/

 

[Of The Vultures]

Interesting discussion. Are there any issues in the case of purchasing a large block with a house, subdividing and selling off the newly created vacant block of land? Does that count as "development"?

Would the situation be different if post subdivision, both properties were sold without the house being rented prior?

 

[Paul@PFI]

Interesting discussion. Are there any issues in the case of purchasing a large block with a house, subdividing and selling off the newly created vacant block of land? Does that count as "development"?

Would the situation be different if post subdivision, both properties were sold without the house being rented prior?

No need to be a "development" which implies other meanings. Even selling the vacant land poses ordinary income. ATO view is that an isolated transaction is sufficient. If the house isn't rented prior it would also mean that any profit on the original land would also be ordinary income. The enterprise has a profit making intention.

Read Tax Ruling TR92/3 for a better understanding. And while reading it try not to be seeking "holes"... Understand the concepts first. There are no easy exceptions. Plenty of people with loads of experience and qualifications have all considered same issues.

 

[Of The Vultures]

Thaks Paul, that clears it up. Just got to watch whose name we put things in if we're going to be up for income tax on profits.

 

[Paul@PFI]

Thaks Paul, that clears it up. Just got to watch whose name we put things in if we're going to be up for income tax on profits.

All part of tax planning. Identify the issues, the potential cost and then find the least cost basis.