Subdivision costs and interest costs

[devo76]

All.

I know this has been discussed before but ill add my experience so far.

basically i purchased a property in 2009. this property has been rented the whole time.
I started the process of building a second dwelling on the back with the intention to keep and rent out.
The beginning of this year the DA was approved and from then up until now i have spent approx $40,000 in subdivision costs ( council contributions,town planner etc).
At tax time my accountant said this was capital in nature and the interest cant be deducted and must instead by added to the cost base.

Since then i have been told that this is not true and the interest can be deducted. I phoned the ATO and they agreed with my accountant that the interest must be added to the cost base and not deducted.
I mentioned the Steele case but this did not sway them. I have now asked for a ruling.

What are other peoples experience in similar situations.
What about construction costs once i start building the house ?
Very interested on what other people have discovered.
Cheers

 

[PropertyDave]

http://www.propertyinvesting.com/fo.../4334166?highlight=Ormiston&fb_source=message

Note: I don't know if this is wrong or right, I just came across it previously so it may help.

 

[Aaron_C]

Never ask the ATO for advice, you'll get advice which will be wrong and you can't rely on it anyway in court.

This is a tough one - it all goes to your intention at the time and the nexus (connection) between the subdivision costs and the derivation of assessable income (i.e. rent).

Let's assume that your intention was to keep the 2nd dwelling to rent out. Fine. However, can you show that there is a sufficient link between the subdivision costs and the proposed rental income? The timing would be important here - you may pay subdivision costs 2 years before you even finish/rent out the 2nd property, and therefore you lose that nexus to claim it as a deduction rather than a mere capital expense. For example, you haven't even started building yet but you are doing all this subdivision? How does the ATO know you aren't just subdividing the land with the intention to just sell the land only later?

A private ruling would clear this up. I am not so sure you can claim it as a deduction here though.

 

[wylie]

Let's assume that your intention was to keep the 2nd dwelling to rent out. Fine. However, can you show that there is a sufficient link between the subdivision costs and the proposed rental income? The timing would be important here - you may pay subdivision costs 2 years before you even finish/rent out the 2nd property, and therefore you lose that nexus to claim it as a deduction rather than a mere capital expense. For example, you haven't even started building yet but you are doing all this subdivision? How does the ATO know you aren't just subdividing the land with the intention to just sell the land only later?

Depending on land size, it could be that the costs involved in the DA don't include actually subdividing. For example, our double block can be reconfigured from two blocks into three, and we could sell the third block or build a house on that block to rent out or sell.

If we wanted to build a house on each 906sqm block, we would have to get the DA approval, and either sell the existing single block with DA approval or actually build the house before the council will split the block into two. The difference between reconfiguring from two into three and reconfiguring from two into four blocks comes down to block size, and all the DA costs would have to be spent before even being able to start building. (This is my understanding of the rules anyway.)

I'm curious to hear what others say about this, as this is something we are thinking of doing too.

 

[devo76]

I should add the Development application is made up of several stages and each must be done before the next can start.

1# Encase sewer line under proposed dwelling.
2# Carry out additions/garage on existing rental
3# Build new dwelling
4# Subdivide

This shows that the nexus cant be broken. The house must be built before i can subdivide.Plenty of other paperwork showing my intention and pressure to build quickly.

I have requested a private ruling also.

 

[wylie]

Another thing I don't understand is that if we go down the track of reconfiguring two blocks into three and decide to sell the middle battleaxe block, how on earth do we (or the ATO) decide the "cost base" for a block of land that has been newly created.

Using the last bank valuations from several years ago, the two 36 perches (906 sqm) blocks with houses on were worth $650K and $550K. If we reconfigure the blocks and create a block in the middle, we could leave the existing houses on 22 perches each with a good sized (28 perch) battle axe block to be sold as a vacant block. I'm guessing we would sell for about $400K but the two existing houses, each with street access and sitting on 22 perches would still be worth about the same as when they had bigger yards (perhaps $50K less each).

So we have "created" a $400K block of land without really taking too much value away from the existing houses.

What sort of tax would we pay on the new block? Would we pay tax on a capital gain of $400K?

 

[Aaron_C]

Wylie I think you apportion the value of the new block based on the price you paid for the 2 blocks originally. But I'm not 100% sure of the answer as there seems to be a few ways to work it out.

 

[Aaron_C]

I should add the Development application is made up of several stages and each must be done before the next can start.

1# Encase sewer line under proposed dwelling.
2# Carry out additions/garage on existing rental
3# Build new dwelling
4# Subdivide

This shows that the nexus cant be broken. The house must be built before i can subdivide.Plenty of other paperwork showing my intention and pressure to build quickly.

I have requested a private ruling also.

I remember Steele's case was something similar to you. We can all speculate on the law but the best way to do it is get a private ruling, as you're doing.

 

[Mry]

Fully deductible. Don't bother getting a private ruling. If your intent is to rent out, its deductible. I would recommend getting a real estate agent's estimate on the rent you could collect based on the plans so you can document your intention.

 

[Tillie]

This is interesting topic. Our situation is somewhat similar. We are looking at the opportunity to buy a block of land with 2 bedroom cottage and massive shed, rent the cottage out initially, subdivide the land and either built a house on the new created block and rent it out or sell the block as it is.

The large shed can be easily rented out separately even without subdivision and it is located on the 'newly created' block. What do you think? Could we argue that we have two separate income streams from one investment one from each side of the block and all DA costs related to subdivision are fully tax deductible and we do not need to add them to the cost base.

 

[devo76]

Fully deductible. Don't bother getting a private ruling. If your intent is to rent out, its deductible. I would recommend getting a real estate agent's estimate on the rent you could collect based on the plans so you can document your intention.

It's well documented. 5 of my 7 DA complaints are on the council website stating that they know I intend to rent the new property out( to which they disagree with).

So far I have spoken to my accountant and two ATO officers and they all say it's not deductible. I need a ruling but I'm not convinced I will be happy with the results.

 

[Aaron_C]

It's well documented. 5 of my 7 DA complaints are on the council website stating that they know I intend to rent the new property out( to which they disagree with).

Stupid NIMBYs trying to tell someone whether they can rent out their own property. Honestly, what's wrong with these people?

 

[devo76]

ATO have received my private ruling request and will respond within 28 days. Will be nice to get an answer on this one as many have different ideas.

Cheers

 

[devo76]

Well my private ruling has just arrived in the mail.

Can I deduct the interest incurred before and during construction of the new dwelling ?

Yes I can.