ownership of new lots

[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.

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

My plan is to buy the lot with an investment partner as tenants in common and 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).

At this stage, ideally I would own 100% of unit 3 as my PPoR and 50% of lot 1 and my investment partner would own 50% of lot 1.

The way I understand is that we could buy the development site as tenants in common with me owning 50% and my investment partner owning 50%. After the creation of lot 1 and lot 2, I would have to buy out my investment partners share in lot 2 so that I own 100%. I would have to pay stamp duty on the amount of the transfer, which would be at the then current market value and then he would incur a capital gain at tax time. How much his CGT would be would depend on the valuation of the block. Would I have to get it valued by a licenced valuer?

Is there any way that we can structure the purchase so after dividing into lot 1 and lot 2, we each own a 50% share of lot 1 and I own 100% of lot 2?

It would probably be fine for him to incur CGT given his circumstances but I would like to explore other options as well.

 

[Terry_w]

Is there any way that we can structure the purchase so after dividing into lot 1 and lot 2, we each own a 50% share of lot 1 and I own 100% of lot 2?

I am not familiar with WA duties act law, but in some states you can have a deed set up at the time of purchase which allows the land to be partitioned. So when sub-division occurs you end up with your half and no stamp duty payable. GST and capital gains tax could possibly be delayed too as it is not a disposal. You need legal advice for this.

As it is a development CGT may not apply, it may just be straight income tax. Speak to your accountant about this.
Don't forget GST in your calculations too. legal advice, conveyancing and changing loans.

 

[perthguy]

I will do. Thanks Terry.

 

[RPI]

WA Duties Act s 39 has an explanation and a nice little example. Don't practice in WA so you need to find a specialist property solicitor but this will give you a start.

Partitions
(1) For the purposes of this section, a partition occurs when property (some or all of which is dutiable property) that is held by persons jointly (as joint tenants or tenants in common) and beneficially is transferred or agreed to be transferred to one or more of those persons.

(2) The dutiable value of a partition is to be determined in accordance with the following formula ?

DV=A * x/y

where ?

DV is the dutiable value;

A is the greater of the following amounts ?
(i) the sum of the amounts by which the unencumbered value of the property transferred or agreed to be transferred to a person exceeds the unencumbered value of the interest held by the person in all of the property
immediately before the partition; or

(ii) the sum of any consideration for the partition paid by any of the parties;

X is the unencumbered value of all dutiable property the subject of the partition;

Y is the unencumbered value of all property the subject of the partition.

(3) The minimum amount of duty payable on a transaction that effects a partition is the amount of nominal duty.

Note: For example, A and B own lot 1 which has an unencumbered value of $400 000 and a boat that has an unencumbered value of $300 000.

The total value of the property being partitioned is $700 000 and A and B are each entitled to $350 000.
A is taking lot 1 by way of partition and the value of that lot exceeds A?s entitlement by $50 000.

A?s duty assessment:
$50 000 (excess entitlement) x $400 000 (value of dutiable property) $700 000 (value of all property)

The dutiable value for the transfer of land to A is $28 571.

 

[perthguy]

Thanks Darryl. That's interesting. I'm a lot more concerned about CGT than stamp duty.

 

[HD_ACE]

A while ago I listened to a lawyer here in perth specialising in property development and tax etc. He explained pretty much this exact situation and the process to go about it as a jv with no stamp duty, gst or cgt payable when apportioning the land or units etc.

If you want his details for a chat or to run it by him I can try and find them for you.

cheers

 

[RPI]

A while ago I listened to a lawyer here in perth specialising in property development and tax etc. He explained pretty much this exact situation and the process to go about it as a jv with no stamp duty, gst or cgt payable when apportioning the land or units etc.

If you want his details for a chat or to run it by him I can try and find them for you.

cheers

That would be using partitioning. Sounds like a good contact to have for WA property

 

[perthguy]

If you want his details for a chat or to run it by him I can try and find them for you.

That would be awesome. I don't have a property lawyer in Perth.

 

[HD_ACE]

That would be awesome. I don't have a property lawyer in Perth.

It appears they are an all round law firm but was very knowledgable in the above.

Pretty sure it was
Colin munro
Munro doig lawyers in west perth
Munrodoig.com.au
089426 6222

Havnt used them uet so have no idea. I just kept their details because its a strategy that will help me along the way.

Worth a call to see if i remember it all correct



Cheers

 

[perthguy]

Worth a call to see if i remember it all correct

Cheers for that. They certainly look the business. I will give them a call if I can find a property to buy.

 

[Ian (WA)]

Perthguy,

Coincidentally, I've just been catching up on overdue reading of API Magazine (Dec 2013 issue).

Article in there by Julia Hartman (accountant) titled "Hidden Traps".....about a small lot subdivision etc. a similar scenario to yours. It's worth a read re GST, CGT implications as a "heads up' as Terry W pointed out earlier.

It may not end up applying to you, but you're better off finding out now, rather than when it's too late!

I'm sure there has been similar threads on this forum about these matters which will be well worth your while searching for and reading.

Cheers!

Ian.

 

[perthguy]

I'm sure there has been similar threads on this forum about these matters which will be well worth your while searching for and reading.

Yeah, I have been catching up on different topics in different threads. Nothing so far that suits but at least I know what to ask! I know I need professional advice though. I just like to be informed when I get it because I have paid consultants big bucks to feed me a line of bull. I only knew it was bull because of hours trolling through the ATO web site.