I contracted to buy a block of land in October 04 and the land will be available in April 05 then I intend to build a new home on it (which will take 6 months to contruct) and then sell it.
I’d like to know if the 50% Capital Gains Tax if sold within 12 months applies to the date of land contract? or on settlement of land?.The contract has no special clauses and in unconditional.
(no I can’t live in it either)
Capital Gains is calculated from contract of sale date.
That is, from the time YOU bought it in Oct 04 (not settled on Apr 05) to the time YOU sold it (not the time the purchaser will settle).
Get some professional advice. You actually will have two assets, the land which was acquired at date of contract and the building.
Also have a look at Business Review Weekly 4 March 2004
an extract:
“Income v. capital gainsThe difference between income and capital gains has been the root of much tax avoidance and evasion during the latest property boom. The broad rule is that owners who hold an investment property are subject to CGT on profits from its sale. By contrast, owners who are in the business of developing, or buying and selling property for profit are subject to income tax on their profits.
Expectations of obtaining either a main-residence exemption from CGT or discount CGT are encouraging many developers, particularly the smaller ones, to wrongly claim that their income is a capital gain.
One of the main problems is that there is much confusion – even among tax professionals – about the difference between capital gains and income. Wolfers says: “I see all the time where one accountant will say a profit is income and another will say it is capital, yet their answers are based on the same set of facts. At seminars last year, I gave 200 tax accountants and tax lawyers examples, and would ask them whether the profit was income or capital. Half the room would say ‘income’, the other half would say ‘capital’. The law is not clear.”
Wolfers believes that the ATO has also not given enough guidance to taxpayers about whether their profits are capital or income. The introduction of discount CGT in September 1999 brought about a massive difference between income and capital. “Within days of this change, members of the tax profession, including Gordon Cooper [from Cooper & Co] and myself, were warning that this would be a big-ticket item for avoidance.
“This issue most commonly arises when mum-and-dad, small-scale property developers are looking for security in their tax treatment. They are stunned when told they are not entitled to the CGT discount. They are stunned because they are doing what tens of thousands of others [who are also not professional developers] are doing and claiming CGT discounts.
“If a person buys a property on a large block of land and wants to subdivide it to build a townhouse to sell, the question of whether the profit is subject to income tax or CGT is not clear.”
The deputy commissioner for personal tax, Raelene Vivian, responds by saying she believes the ATO provides much guidance for such small property developers – written and verbal.”
Hi CRJ (& Gumshoe)
Thank you for the summary on the issue.
One issue that was not mentioned, and one that Gumshoe needs to be careful of, is that of the investor’s intent when the asset (in this case property) was purchased.
In Gumshoe’s case the stated intent is to settle on the land, build a dwelling and then sell it for gain.
This places it clearly in the ‘income’ bracket and NOT the ‘capital gains’ bracket. This being the case Gumshoe it wouldn’t matter if you held the property for 5 years after it’s completion (renting it out in the meantime), the original INTENT was one of profit.
You may want to review and perhaps document your intentions [biggrin]
Originally posted by betterbiz:Hi CRJ (& Gumshoe)
Thank you for the summary on the issue.
One issue that was not mentioned, and one that Gumshoe needs to be careful of, is that of the investor’s intent when the asset (in this case property) was purchased.
In Gumshoe’s case the stated intent is to settle on the land, build a dwelling and then sell it for gain.
This places it clearly in the ‘income’ bracket and NOT the ‘capital gains’ bracket. This being the case Gumshoe it wouldn’t matter if you held the property for 5 years after it’s completion (renting it out in the meantime), the original INTENT was one of profit.
You may want to review and perhaps document your intentions [biggrin]Betterbiz,
Could you please indulge me here and tell me where on earth you got this INTENT information from???[blink] Of particular concern, is your comment (as I have highlighted in red) which basically implies you can buy, build, rent for 5 years and then sell all CGT free based on your INTENT.
INTENT does not come into this at all.
The only possible way it could be considered is IF gumshoe had a loan for the land, he may be entitled to claim the interest paid as a tax deduction because it was his INTENTION to erect a revenue generating building on it, or he intended to onsell it (as seems to be the case here).
This may be applicable if PI is what you do as a BUSINESS, in which case, there are other criteria that has to be met to satisfy the use of INTENT.
However, this is not a guarantee and advice from a tax professional is highly recommendedCGT is always payable on land UNLESS:
You build your PPOR, and
You move into it immediately upon completion, and
You move in for no less than 3 monthsThe CGT is reduced by 50% upon ownership of the land for a period of no less than 12 months.
And as I already stated in my first post, CGT is calculated from CONTRACT DATE OF SALE not settlement.
Cheers,
Jo
Jo,
He’s not saying there’s no tax on the gains at sale, just that those gains would be treated as income for tax purposes not capital gain.
Thus no 50% discount.
GP
Yes GP,
But LAND is not CGT exempt UNLESS you build your PPOR on it. Should you choose to build a revenue generating property on same (using the above INTENT example) it will still be liable for CGT at 100% rate (<12 months) or 50% (>12months) discounted rate.
I am not familiar with CGT FOR BUSINESS ventures, however it is my understanding that this INTENT is difficult to justify on personal gains transactions, and as such if gumshoe in not in the business of trading IPs how would he argue this “intent”??? Regardless of whether the revenue is classed as CG or not.
But all in all, why would you not want to claim any profit of sale as CG (as opposed to income) when you can be eligible for 50% discount whereas you normally would not if calculated simply as income???
Cheers,
Jo
Jo,
But LAND is not CGT exempt UNLESS you build your PPOR on it.Not talking about it being exempt from anything. Just saying the gains made on sale may be considered income rather than CG.
it will still be liable for CGT at 100% rate (<12 months) or 50% (>12months) discounted rateNot if it’s classed as a business development (ie. bought with the intention of improving it and then selling it for a profit) rather than an investment. In that case the gain would just be considered income, with no 50% discount available.
It’s the same with share trading. If you do it as a business there’s no capital gain. Everything is income.
The only real advantage of that is if you make a loss, then it can be offset against other income.
how would he argue this “intent”???With property I don’t know. With shares, there are a number of things the ATO can take into consideration, but the underlying thing is the intent. As with many ATO things though, if your intent gives you a tax advantage, they may try and tell you what you really intended and force you to prove them wrong. [baaa]
why would you not want to claim any profit of sale as CGMostly you would, unless you made a loss in which case it might be better as income.
However, circumstances may not give you a choice. A bit hard to say your intention is buy and hold when you’re turning over a dozen a year [biggrin]
In the case of a one-off though, yes I agree it may be difficult for either party to prove the intention one way or the other. Unfortunately the ATO has the upper hand there, in that they can say what they like and the onus of proof is on you.
GP
Fair call GP [biggrin]
I do see your point, and yes INTENT is a tough point to argue, hence I’m glad it’s not me trying to prove mine.
Also, agreed that unless you are claiming a loss, if you can get away with claiming any profit as CG you stand in a much better financial position (tax wise). All in all, ANY loss (property or shares) is best offset against your income.
Perhaps the most poignant of statements here GP:
Unfortunately the ATO has the upper hand
Ain’t that the truth!!! [glum2]
Gumshoe, as suggested SEEK A TAX PROFESSIONAL’S ADVICE…..someone like Julia (Bantacs) perhaps as this is not cut and dry situation.Cheers,
Jo
Hi Jo & GreatPig,
Jo, sorry to have confused you. As GreatPig correctly picked up my ball and ran with it … all I was saying is that ‘income tax rules’ as opposed to ‘CGT’ rules would apply in Gumshoe’s case.
Assuming there is a gain made, that gain will always be taxed unless it meets the (only) current EXEMPTION rule – that rule being the PPOR exemption.
As GreatPig suggested, intent is a nebulous thing to definitely pin down. It was correctly suggested that it would be difficult to claim (tho not entirely impossible) that you had invested for CG when you’re turning over 6 properties a year.
Would you believe that a self employed builder would have a devil’s job to convince the ATO that s/he had bought for CG and NOT with an income purpose?
One’s intent at the start of doing something IS VERY IMPORTANT in tax land. As is being able to demonstrate WHY/HOW that ‘intention’ changed along the way perhaps.
Monopoly, talk to any tax professional worth their salt, and they will tell you just what a turning point “intent” can be. If nothing else it’s often the cornerstone for arguing for/against the application of Part IVA of the Tax Act (as it is more commonly known as). Intent and dominant purpose (for doing something, or not doing something) can sink a case.
When the 50% exemption rules for CGT were released (in their draft form)many of the better tax commentators predicted mass tax evasion through people claiming that the 50% rules applied to them.
As time goes by, ATO audit activity in this area will increase. The ATO (in the 2004 tax year and beyond) is already focussed on property investors and the liklihood that investors will receive firstly the standard questionnaire followed by a closer audit is now dramatically increased.
If you happened to have disposed of a property (in the year that you are being audited on) AND have claimed the 50% CGT exemption, you can bet your bottom dollar that the investor’s INTENT will be examined very closely.
The larger your (property) portfolio the more likely it is that you will have to defend the position that you are NOT conducting a BUSINESS. Because if you are (in the business of) then as GreatPig rightly said – “all your gains become taxable”. Now whether you want to call those ‘gains’ “CGT with no 50% exemption” or income is a case of semantics (notwothstanding that the money you made would be reported in a different section of your tax return).
Contact the ATO and ask them for their little booklet – “Am I In Business”. Have a read of that then tell me – At What Point Will A Property Investor Be Running A Business?
Monopoly, I’d rather throw a triple, go to jail and wait out my 3 turns. You think Mayfair is the best property on the board? THAT’s where the taxman lurks – just before you look like getting a payout for passing go. He’ll either slug you with the rent if you step foot on his property or he slugs you with the $200 tax bill instead.
[baaa]p.s. Hey, if you want a really great debate, let’s talk about the (effective) removal of allowing a deduction for negatively geared properties. Mr Keating (when he was our illustrious Treasurer) did it from approx 1983 thru 1985 tax years inclusive.
Over the past 3-4 years they’ve done the same thing to small businesses that make losses.They can no longer offset those losses against other income.
IMNSHO it isn’t a great leap to extend those tax rules to our property portfolios. Heck they could even do it on a property by property basis and not allow the aggregation of a property portfolio where some are +’ve and others are -‘ve.
Originally posted by Monopoly:All in all, ANY loss (property or shares) is best offset against your income.
Ahhhhh, but to achieve that you’d have to demonstrate that you are IN THE BUSINESS, and hence the ‘loss’ is a trading loss.
This can be a two-edged sword. Once you are (successfully)accepted as being in business, you can’t then argue for a CGT position (on the same type of activity) in future years.
Sometimes it might be better, after considering your options, to carry-forward the capital loss.
Betterbiz,
I have been investing in property for 24 years, buying and selling since I was 18; not as a trader, developer or any such business, but for my sole benefit. As I said in one of my earlier posts I am not familiar with CGT for Business, however CGT for individual gains; that I can (and do) lay claims to knowing something about, and sadly, to the unfortunate tune of just under quarter of a million dollars!!! [glum2] Yes, I had some pretty amazing CG in my years post 1985!!!
Notwithstanding, although I plead igorance to the “business” side of investing (that is, as a trader or developer of sorts) I am not that naive as to think that should our beloved brethren at the ATO be convinced of your position as a professional investor, that any profits will selectively by your choosing be deemed eligible under CGT ruling!!! Please, cut me some slack here!!![rolleyesanim]
As per my comment to GP, I will repeat it for your benefit. Being in a position that requires the argument of INTENT is not an enviable one to be in I would assume, and until legislation sets clear delineation as to what is and what is not intent, I would think many unsuspecting investors will find themselves in financial do-do come tax time. Furthermore, if trained tax professionals can’t sort it out, heaven help the layman!!!
The larger your (property) portfolio the more likely it is that you will have to defend the position that you are NOT conducting a BUSINESS.
I have never been challenged on this, and at one point, I had over a dozen properties (not including my family home); perhaps they overlooked it seeing as I was already paying out such huge dividends as the result of massive profits from sales proceeds??? [tongue] Thanks for the tip on “Am I in Business” I will make a point of securing a copy. I have run a successful business prior to retiring from the paid workforce in 2002, although it was not in the business of property trading.BTW….I’d get a real kick out of a debate on the infamous (Keating) abolition of negative gearing and the catastrophic impact it had on various aspects of investing for the short time before it’s reinstatement only a few years thereafter. I don’t put anything passed out pollies!!! You just gotta love these brockoffs don’t you??!! [blush2]
Cheers,
Jo
Hey Jo, I’m not in attack mode …. ‘onest injun [biggrin] (Ferangii are gentle creatures now!!!)
I’ve worked in my own tax practice for almost as long as you have been investing. Not to mention the obligatory few years working in another practice before I cut loose and set sail on my own.
It’s been fun but doing and overseeing approx 600 investor-style returns a year has its moments.
Maybe it’s time for a seachange.
Prolly time I joined the Grey Army or Jims Dogwash
As for Keating as Treasurer…. yes he did kill it for the property investors for a few years, but he also gave us the dividend imputation system.
I look forward to the year that I pay $1m in tax.
Just imagine what I would have earned if I could get the bill down to a mill [baaa]
No problem Betterbiz,
I didn’t feel you were “attacking” per se, although I could have sworn there was a podium watermark on your post!!! [tongue]
I couldn’t begin to imagine doing your job, nor would I want to. I should think you have had your days of feeling you have been beaten to a pulp by the stupidity stick held firmly in the grips of some of your clients.[wacko]
You may be right; a seachange…..or perhaps a short holiday…..my suggestion; the Cook Islands (Rarotonga or Aitutaki) pure heaven!!![sunny]
Cheers,
Jo
P.S. I’m not really peeved about the quarter mill in CGT; not when I look at the bigger picture!!! [winking]
Originally posted by betterbiz:One’s intent at the start of doing something IS VERY IMPORTANT in tax land … If nothing else it’s often the cornerstone for arguing for/against the application of Part IVA of the Tax Act
One thing I’d be interested in your view on, since you have a tax practice, is something Julia brought up on Somersoft.
Are you familiar with hybrid discretionary trusts, and the personal borrowing of money to buy income units in the trust for investing and then claiming the interest as a personal tax deduction?
Her point there was essentially if capital gains from trust investments were being distributed discretionally rather than back to the unit holder, could the ATO perhaps try and argue that not all of the interest should be deductible since effectively it’s not entirely being used to earn an income for the borrower (in that some of the gains are being discretionally distributed elsewhere)? Specifically she was asking if anyone doing this had been audited to test it.
I’m looking at a similar issue with div7a, where I have funds in a company and want it to buy income units in an HDT with capital gains in the trust being distributed elsewhere (no borrowings though). I’m wondering whether similar to above, the ATO could argue that for the percentage of total returns being distributed elsewhere as capital gains, that percentage of the company funds would fall under div7a since they’re effectively being used to generate returns for individuals rather than the company – even though the company would still receive all trust income as the units entitled it to.
I am getting professional advice on this, but I’d still be interested in your opinion.
Cheers,
GPThis relates to a project I’m doing. I’ve just recently bought some land and plan either to develop it as a short term accommodation site, or subdividing it and selling off individual blocks.
What would be the CGT implications of option 1 if built the on the site and ran it as a short term accommodation business and then sold it? Or if I was going to build the properties, but got a better offer on the land alone and so sold it?
Also what would be the tax implications of simply subdividing it and selling it off? (Of courser I’m guessing no CGT tax discount?).
I have it in a trust with a company acting as trustee. The trust has no other asset (though I have 3 CF+ properties in my own name).
Thanks for any help! It will be much appreciated!
JackW
Originally posted by GreatPig:One thing I’d be interested in your view on, since you have a tax practice, is something Julia brought up on Somersoft.
Then perhaps we should ask Julia to respond? I’m not familiar with her writings and the circumstances behind her comments. However, with that said, let me take your questions as they now stand and in isolation to what Julia may or may not have said. OK?
Are you familiar with hybrid discretionary trusts, and the personal borrowing of money to buy income units in the trust for investing and then claiming the interest as a personal tax deduction?Yes I am.
Her point there was essentially if capital gains from trust investments were being distributed discretionally rather than back to the unit holder, could the ATO perhaps try and argue that not all of the interest should be deductible since effectively it’s not entirely being used to earn an income for the borrower (in that some of the gains are being discretionally distributed elsewhere)? Specifically she was asking if anyone doing this had been audited to test it.GP, can I respectfully suggest that you need to separate and straighten out in your own mind just who is borrowing the money and who is doing the investing… they are two distinctly different entities (both legally and for tax purposes)
GP, I don’t see a problem here. YOU have invested in income units which (ordinarily, depending on the Deed) do not attract any sharing of capital gains. The purpose test (for deductibility of the interest) is applied against you, NOT the trust.
In your scenario above, the HDT has NOT borrowed. It has issued income units (to you).
Whether the HDT uses it for income generating purposes or not is (almost) irrelevant, although I wouldn’t like to see there being NO income generated back to the income unit holders. Why not? Because you’d could hardly argue your case for deductibility if there was NO LIKELIHOOD of you receiving a +’ve income stream from the HDT income units at some stage in the future. That is not to say that there MUST be an INCOME payout by the HDT EVERY year <g>
I’m looking at a similar issue with div7a, where I have funds in a company and want it to buy income units in an HDT with capital gains in the trust being distributed elsewhere (no borrowings though). I’m wondering whether similar to above, the ATO could argue that for the percentage of total returns being distributed elsewhere as capital gains, that percentage of the company funds would fall under div7a since they’re effectively being used to generate returns for individuals rather than the company – even though the company would still receive all trust income as the units entitled it to.Firstly, the income/captial MIX of earnings by the HDT is irrelevant. If the Deed is properly drawn, then the income units and the capital units are completely separate beasts, each having distinct rights as to income, capital & capital profits. Indeed you can often find some units in a HDT that are a blend of the two primary types of units – ie a hybrid unit in a HDT – a sorter double whammy if you like. These ‘mixed units’ were very popular back in the 80’s with unlisted property trusts. But that’s another topic. However it is a reminder to be completely aufait with your Trust Deed and what it allows/doesn’t allow.
Now, back to your question…..
Let me be sure that I understand the circumstances – it is the COMPANY investing in the income units and not YOU using the company funds to invest in the income units in YOUR NAME?
If it is the latter circumstance (units in your name having used company funds) then yes you would have a Div7 problem and therefore should make a dividend distribution first.
If it is the former case (ie the company investing in its name) then, I don’t see a Div7 problem. Why? Because there has been no loan to you which might otherwise be contrued, or deemed (under DIV7) to be a dividend to you.
Just another thought…. on the basis that the (same) company was a discretionary beneficiary under the same HT, it might be worthwhile running the numbers to see whether you’d be better off:
1. distributing some (unadjusted – for the 50% exemption) capital gain.
2. paying 30% company tax rate (as opposed to the 24.5% personal tax rate)
3. then paying a fully franked dividend to a low income shareholder…. just something to cogitate over your rice bubbles.
I am getting professional advice on this, but I’d still be interested in your opinion.Well there you have it GP
I didn’t feel you were “attacking” per se, although I could have sworn there was a podium watermark on your post!!!Sorry, sometimes I appear to be on the soapbox but it’s just my chatty style of writing. It’s as though you were sitting across the table and my verbage is intended for professional clarity, not lecturing.
Besides I’m way too versed to EVER lecture a lady …. their handbags can hurt !!! [baaa]
Originally posted by betterbiz:YOU have invested in income units which (ordinarily, depending on the Deed) do not attract any sharing of capital gains.
Yes, the deed allows income-only units with no right to capital gain.
The purpose test (for deductibility of the interest) is applied against you, NOT the trust.That makes sense.
Whether the HDT uses it for income generating purposes or not is (almost) irrelevantThat, I think, is the prime question here (and with the Div7a issue). How little income back to the unit holder (relative to the amount of CG going elsewhere discretionally) might make the ATO question whether or not your main intention in buying the units was to generate an income stream for yourself (or the company in the latter case)?
it is the COMPANY investing in the income unitsYes, in its own name.
Because there has been no loan to you which might otherwise be contrued, or deemed (under DIV7) to be a dividend to you.Hopefully that would be the case, but reading through some of the subdivision stuff there it seems that 109C basically says any payment from the company to a shareholder or related trust causes a dividend unless exempted by one of the other clauses, the only one of which I can see being relevant being 109J about discharging pecuniary obligations – since it has to pay for the units it bought.
But then I wonder about the arms-length transaction thing, and whether it could be argued that a company in the normal course of business would not enter into such a transaction.
then paying a fully franked dividend to a low income shareholderUnfortunately I’m the only real shareholder and am on the top tax rate, which is why I’m having all this hassle in the first place [
].Thanks a lot for your detailed response! Much appreciated.
And sorry to the original poster for causing a temporary deviation in the subject of this thread.
Cheers,
GPWhether the HDT uses it for income generating purposes or not is (almost) irrelevantThat, I think, is the prime question here (and with the Div7a issue). How little income back to the unit holder (relative to the amount of CG going elsewhere discretionally) might make the ATO question …..Irrelevant GP, forget all about the capital gains of the HDT and what happens to them – you have invested in INCOME units so the amount of capital gain and who it’s distributed to doesn’t matter. As to how little income is being received before it would otherwise attract the fiscal fiend’s attention?
1. no worries as long as the Deed is adhered to
2. can be zero in the year/s that the HDT makes a (taxable) loss.
3. you credit the ATO with far more analytical nouse than they deserve. They’re not stupid but nor do they have the resources to undertake the analysis that worries you so.
4. the tax return of the HDT says income of $x. The distribution schedule of the return allocates that income to whomever. So long as $x equals distrubted dollars then the HDT pays no tax, AND there is nothing that automatically causes the HDT to pop-up on a report that could either generate a question, and certainly not an audit.
5. heck, there’s nothing in the tax return that even discloses the fact that we’re talking about a HDT. In the eyes of the ATO it is simply a trust lodging a trust tax return.
6. don’t forget that we operate under the self-assessment regime.At the end of the day, all you need to do is follow the Deed and you won’t have a problem
it is the COMPANY investing in the income unitsYes, in its own name.GP, break the ‘transaction’ down into layman’s terms. The company is making an INVESTMENT in income units in a HDT. End of story. Hey, think of it as my HDT (it’ll help you see the two legal parties involved here)
It is NOT using/applying it’s money for YOUR benefit and therefore (imnsho) Div7 & 109 do NOT apply. If they don’t apply then you don’t need to worry about their subclauses or the need to meet one of the exemptive fine print issues.
then paying a fully franked dividend to a low income shareholderUnfortunately I’m the only real shareholder and am on the top tax rate, which is why I’m having all this hassle in the first place [
].[/quote]Then you may want to consider your domestic situation, or alternatively study the beneficiary classes of your HDT a little more closely <g>
Thanks a lot for your detailed response! Much appreciated.
You’re welcome. Let’s see if your paid advice concurs <g>
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