Tax implications of developing triplex?

[BLTN]

Hi all,

I'm seeking some guidance on the tax treatment (GST and CGT) of a hypothetical situation. Here are the (simplified) numbers:

Land + all purchase costs = $500K
Build + all other costs = $700K
Total cost of development = $1.2m

Say the newly developed triplex units are able to be sold for $500K each.

I've listed 3 possible options below and what I think would be the tax implications under each scenario. Is anyone able to advise whether I am on the right track or way off?

Option 1 - Sell all three on completion

In this option, you sell all three for $1.5m, requiring you to pay $136K GST (1/11 * $1.5m), leaving you with $164k profit, of which you'll pay CGT at your marginal rate of tax.

I think this is how this works, although I'm not sure whether the CGT would receive the 50% discount if the development took more than 12 months, or if it only applies if you hold the asset for 12 months from completion (technically you made the CG over a period of over 12 months, assuming the development took at least that long, so it would seem reasonable that the discount would apply)

If each triplex is treated separately, they would need to be valued upon completion (I'm guessing) and then CGT is calculated from that point onwards - in which case there would seem to be a window from settlement to completion of the development where I have no idea how the CG would be calculated or treated.

Questions

- Is the profit deemed a capital gain or income?
- If it is CG, how exactly is the CGT calculated and how can you get the 50% discount? (i.e. does the 12 months start from settlement, or from completion of the build?)

Option 2 - Sell one or two, and keep the rest

Under this option, I would think that you don't pay any CGT (as you haven't recouped your $1.2m yet), but I'm not sure whether you pay GST. Seeing as you haven't made any profit yet, I wouldn't think you would have to pay any.

BUT - if each triplex is treated separately, and the cost of each is considered to be $400K ($1.2m/3), then you have made profit on each and would be liable for both CGT and GST. This gets complicated where the triplexs are not identical - but I guess you could pro rata the final costs (i.e. the $1.2m) across the 3 according to some kind of guidelines.

Questions

- If you sell one or two properties (but have not recouped the total cost of the development), do you still make a 'profit'?
- If so, is this treated as income or CG?
- More generally, are the costs of the development (including purchase price and associated costs) prorated to each individual building to determine an estimated cost base? (this question also applies to the PPOR option below)

Option 3 - Purchase land as PPOR and live in one of the triplexs post completion

This one I have no idea what would happen. My guess is that again, the costs would be prorated against the three triplexs and they would each be treated individually - so no GST or CGT on the PPOR. But potentially CGT and GST on the other two if you sell them.

Questions

- Just generally, what would be the treatment here? With everything. Seems to be a minefield. The only logically approach I can think of is to work out some cost base for each and they all get treated separately (in this case, one as a PPOR and the other as IPs)

Option 4 - You move into one of the triplexs post completion, but did not purchase the land/property as PPOR

What the hell happens here?

 

[westminster]

Option 1 is wrong I think. Its either CGT or GST and income tax (if in personal name) or GST and company tax (if in company name). Not both.

Sell all 3 and you are in GST plus income tax land.

Option 2 is done pro rata I believe. So 1/3 of the cost is attributed to the profit for the 1 unit you sell and you might get away with simple CGT on this deal if in personal name

Option3: NFI

 

[Terry_w]

Don't forget the state taxes - stamp duty and land tax.

Also developments are generally not subject to CGT, jut income tax.

 

[coastymike]

Sounds like revenue account so capital gains provisions not relevant.

Cant see any consideration for the margin scheme.

 

[BLTN]

Just amended the original post to make the questions a bit clearer.

If anyone can shed some light on Options 3 and 4 in particular it would be greatly appreciated!

It seems to me that the only way to deal with a lot of the issues in these situations is to treat each final triplex separately by assign them a cost base and taxing them all respectively.

 

[Paul@PFI]

3. Your question is flawed. You cant acquire "land" as a PPOR. Only when a dwelling is built and you move in can a place be a PPOR if you also own it. Also land tax applies up to that date too. So issue #4 is same as no 3...

Remember when you acquire the land and demo the dwelling etc then land is trading stock and forms part of the cost of what you build on. When you move out the trading stock reverts to a CGT cost base (maybe).

- You cant claim 1/3rd of the GST on the one you intend to live in.
- GST applies to the 2 you sell.
- When it sell (within 5 years) you still incur GST. After that = No.
- Profits on all sales are NOT CGT but on ordinary revenue. account.

You need some tax advice would be my main comment. Your understanding is raw and if you get it wrong it will affect your calcs and outcomes.

Each of the three dwelling will have a cost. A "cost base"no. That a CGT term. The first issue some smart people identify is a scheme to dump costs onto the ones being sold. No. That's a fail as there are some anti-avoidance rules which deal with this methodology using market values. If all three are similar I would use a 1/3rd apportionment with minor +/- for differences in value eg : street front v's larger yards etc...

 

[GaryT]

As per Paul's comments - is there an existing dwelling on the land? How long do you intend to live in this property before considering improving it by demolition of the dwelling and building 3 units?

As Paul says you really need more specialist advice here.

 

[BLTN]

3. Your question is flawed. You cant acquire "land" as a PPOR. Only when a dwelling is built and you move in can a place be a PPOR if you also own it. Also land tax applies up to that date too. So issue #4 is same as no 3...

Remember when you acquire the land and demo the dwelling etc then land is trading stock and forms part of the cost of what you build on. When you move out the trading stock reverts to a CGT cost base (maybe).

- You cant claim 1/3rd of the GST on the one you intend to live in.
- GST applies to the 2 you sell.
- When it sell (within 5 years) you still incur GST. After that = No.
- Profits on all sales are NOT CGT but on ordinary revenue. account.

You need some tax advice would be my main comment. Your understanding is raw and if you get it wrong it will affect your calcs and outcomes.

Each of the three dwelling will have a cost. A "cost base"no. That a CGT term. The first issue some smart people identify is a scheme to dump costs onto the ones being sold. No. That's a fail as there are some anti-avoidance rules which deal with this methodology using market values. If all three are similar I would use a 1/3rd apportionment with minor +/- for differences in value eg : street front v's larger yards etc...

Thanks for the reply.

To clarify, I mean claiming the land using first home owner concessions etc (wouldn't this then be exempt from CGT etc??). Or, if buying a house to develop, claming the first home owner concessions and living in it for 6 months before developing (and then moving into one of the end products).

In reality, neither of these are likely to happen thanks to the drop in the stamp duty concession threshold over here (practically impossible to buy a development site in that price range).

Thanks for the clarity on the last point - that is exactly how I assumed it must work (also with guidelines in place to avoid gaming the system).

It does seem like the most tax effective strategy is to hold them for 5 years though (not to mention the fantastic depreciation over this time). Although you would then be liable for quite a fair amount of CGT if you sold after that point.

Unless CGT is not part of the equation - I don't really understand your comment in that regard though? (the part in bold above)

As per Paul's comments - is there an existing dwelling on the land? How long do you intend to live in this property before considering improving it by demolition of the dwelling and building 3 units?

As Paul says you really need more specialist advice here.

My questions apply to both scenarios, or either purchasing land (and hence building as soon as approval is obtained) or purchasing a house to knock down and build on as soon as approval is obtained (either renting it out or living in it in the meantime).

Surely these sorts of issues have come up before?

I find it ridiculous that our tax system is so complicated that we need to see a tax specialist for every single little question that comes up. I've dug and dug on the ATO website and can't find the answers.

That is an example of a very poor tax system if you ask me.

 

[sanj]

you are looking to spend over $1m all up developing a property and, based on your questions, there are some potentially large gaps in your understanding of how it will be treated tax wise. note this is in no way criticism, we've all been there, i know i certainly have.

the relatively small amount you might pay for SPECIFIC advice and more importantly understanding (which you can then use going forward for other things) is money well spent. this isnt a little question youre asking, you have 3 or 4 possuible scenarios and need to figure out if it is in fact of an income or capital nature as well as probably wanting to work out the best structure etc.

 

[BLTN]

you are looking to spend over $1m all up developing a property and, based on your questions, there are some potentially large gaps in your understanding of how it will be treated tax wise. note this is in no way criticism, we've all been there, i know i certainly have.

the relatively small amount you might pay for SPECIFIC advice and more importantly understanding (which you can then use going forward for other things) is money well spent. this isnt a little question youre asking, you have 3 or 4 possuible scenarios and need to figure out if it is in fact of an income or capital nature as well as probably wanting to work out the best structure etc.

They seem like fairly basic considerations for someone doing a development though? Hell, they were the first things I thought of. Surely other people have come across these issues.

I understand the merits in seeing a tax specialist - i.e. small cost given the very material impact of potentially using the wrong tax treatment (or calculating numbers on faulty assumptions).

What irks me, and this is a more general criticism, is how our tax system is so convoluted that we need specialists for EVERYTHING - I've read almost everything I could find on the ATOs website and still couldn't do my own depreciation schedule for example. I've read everything on the ATOs website and still can't answer some questions about GST.

It seems nuts to me that our tax system is so complex that it is virtually impossible for your average person to fill it out correctly.

 

[sanj]

They seem like fairly basic considerations for someone doing a development though? Hell, they were the first things I thought of. Surely other people have come across these issues.

I understand the merits in seeing a tax specialist - i.e. small cost given the very material impact of potentially using the wrong tax treatment (or calculating numbers on faulty assumptions).

What irks me, and this is a more general criticism, is how our tax system is so convoluted that we need specialists for EVERYTHING - I've read almost everything I could find on the ATOs website and still couldn't do my own depreciation schedule for example. I've read everything on the ATOs website and still can't answer some questions about GST.

It seems nuts to me that our tax system is so complex that it is virtually impossible for your average person to fill it out correctly.

this is where we disagree.

you arent talking something simplistic like say negative gearing or travel allowance or whatever where in fact the info you need is of a general nature and can actually be found on the ATO website.

you are asking a somewhat complex question and not one that the "average person" would ask, unless the average person develops property.

we dont need specialists for everything like youre claiming but in this case it is certainly recommended.

also, more importantly than the specific advice you would get is the potential to understand the way it works a lot better and that info is invaluable moving forward.

 

[BLTN]

this is where we disagree.

you arent talking something simplistic like say negative gearing or travel allowance or whatever where in fact the info you need is of a general nature and can actually be found on the ATO website.

you are asking a somewhat complex question and not one that the "average person" would ask, unless the average person develops property.

we dont need specialists for everything like youre claiming but in this case it is certainly recommended.

also, more importantly than the specific advice you would get is the potential to understand the way it works a lot better and that info is invaluable moving forward.

Just to clarify, when I said 'average' person, I was referring to the fact that pretty much every person fills out their tax return incorrectly, even with the simple things (i.e. what you can and can't legitimately claim for work expenses, working from home expenses, travel allowances etc). It was just a general point.

These questions are definitely more complex, but I think that fundamentally, the information should still be available (freely) from the ATO.

In any case it seems like I will need to talk to someone. Which leads to the next question of who to talk to...

 

[Terry_w]

What irks me, and this is a more general criticism, is how our tax system is so convoluted that we need specialists for EVERYTHING - I've read almost everything I could find on the ATOs website and still couldn't do my own depreciation schedule for example. I've read everything on the ATOs website and still can't answer some questions about GST.

It seems nuts to me that our tax system is so complex that it is virtually impossible for your average person to fill it out correctly.

It irks me when it is cold too, like today. But I can't change this so I just put on more clothing You are unlikely to be able to change tax law, so just get some advice.

 

[TMNT]

you are looking to spend over $1m all up developing a property and, based on your questions, there are some potentially large gaps in your understanding of how it will be treated tax wise. note this is in no way criticism, we've all been there, i know i certainly have.

the relatively small amount you might pay for SPECIFIC advice and more importantly understanding (which you can then use going forward for other things) is money well spent. this isnt a little question youre asking, you have 3 or 4 possuible scenarios and need to figure out if it is in fact of an income or capital nature as well as probably wanting to work out the best structure etc.

Geez, Just let the guy ask a question, and leave him alone,

Would you be happy if he changed his figures to 450k construction and 200k land????

 

[sanj]

Geez, Just let the guy ask a question, and leave him alone,

Would you be happy if he changed his figures to 450k construction and 200k land????

Your question implies I'm unhappy with his queries. My post was purely with his best interest at heart, you sound yo be the only unhappy one here.

Bad day at the office?

Fwiw the point stands, a commercial venture like this is best served with specific advice instead of Internet opinions

 

[oc1]

Geez, Just let the guy ask a question, and leave him alone,

Would you be happy if he changed his figures to 450k construction and 200k land????

Settle down mate, that was a great post by Sanj. Something any developer or would be developer must know.

 

[mrdobalina]

I'll have a shot at answering this, just to test my knowledge and assumptions.

Option 1 - Sell all three on completion

If margin scheme applies, then $27.3k GST is payable ($1.5m-$1.2m)*1/11
The remaining $272k is subject to income tax (or company tax if purchased via company).
If you hold for 12 months then sell; then CGT applies and you get the 50% discount

Option 2 - Sell one or two, and keep the rest

Cost base is apportioned over the one or two properties you are selling (i.e. the cost base for each unit is $400k).
The same calcs from Options 1 applies for these units that you sell.

Option 3 - Purchase land as PPOR and live in one of the triplex post completion

For the one or two units that you sell, the same from Option 2 applies for these units.
If you live in one of them as PPOR, then it will be treated as your PPOR.

Option 4 - You move into one of the triplex post completion, but did not purchase the land/property as PPOR

I don't think this is any different to Option 3.

I'm probably wrong on all accounts.