Hi,
I need to know how tax works in the following general senario.
Example:
Lets say in one tax year I buy a block of land for 400,000 and then build 5 units for 600,000.then sell 4 four of the units for 250,000 each and still own the fifth unit and the body corp.
How am I taxed when I put in my return that year ?.
Essenially Ive made ive spent $1000000 and made $1000000 so profit is $0 until I sell the final property of course.
And then what if I retain the fifth unit for over a year is the capital gains halved on the sale price of the final unit ?
Does acting under a company or trust change any of the rules ?
Can anybody help me out here ?
It would also be interesting to know how tax works in the case of a sub division if you sell half a block of land and keep one half what happens at tax time.
Thanks,
Mark.
Hi Mark, lots of questions here!
Firstly let me qualify this by saying that I have a bit of experience with this but you should get everything verified by a tax accountant before doing anything.
The tax office would probably consider you to be in the business of developing as this isn't exactly a small venture.
Whether you're deemed to be in the business of developing or not really changes your tax situation.
The rest of my feedback below assumes that you are in the business of developing.
Your profit in the first year if you keep unit # 5 (by the way, you wouldn't own the body corp, you'd only own 1/5th of it if you only own 1 unit) would be something like this:
Sale of 4 units $1,000,000
Plus market value of unit 5 $250,000
Less cost of land & building costs $1,000,000
Profit of $250,000
It doesn't matter that you haven't actually sold unit # 5, you'd still have to include it in the figures because it's treated as stock on hand.
You also need to consider GST because being new units, your sales price would have to include GST.
This is a whole new discussion which you can't ignore because it could reduce your profit considerably.
There is no CGT if you're in the business of developing, so therefore no CGT concessions if you hold greater than 1 year.
You just pay tax on the end profit. The tax you pay depends on who owns the property.
If the property is in a company, you'll pay 30% on the profits.
If the property is in a family trust, you have the flexibility to distribute the profits to family.
So the idea is to distribute the profit to the lower income earners to keep the tax % down.
Sorry, can't help you re: the tax on the subdivision.
Sounds like you need to make an appointment with your tax person.
Keep at it. It sounds hard now, but once you've got your head around it, it's not that bad.
Good luck.Mark
Not having a go at Duarango being his first but regretfully there is a few inaccuracies.
I will come back to this post later this evening (just stepping out the door) and answer it properly.
Richard Taylor | Australia's leading private lender
Hey Richard,
You must be back home by now !! Would you please answer the first question soon – I too am interested in the reply !!
Sorry been flat out over the last couple of days.
Ok some immediate observations:
1) The size of the project is relatively immaterial as far as the ATO is concerned and it more about the regularity.
If this was a one of project there is every likelyhood that you would be able to claim any GCT concession on any unit held for
> 12 months.
2) Tax whether it be trading profit or CGT is charged on each and every sale. The cost base is worked out using a sq metre
formula. Assuming the total footprint of the land was 1000 square metres and you got 5 equal units on the land then each
unit would be assessed as 20% of the total costs. The exception is where one particular unit can be allocated a greater value
because of its top floor location or better quality fittings etc etc.Where the unit is retained no Tax is payable until the sale of this unit. (Of course the contract date is the assessed date for CGT rather than the settlement date where CGT is assessed or the settlement date only if the income is classified as trading income).
3) Yes you would need to consider GST however if done properly you would have purchased the site using the Margin Scheme.
This condition would need to be reflected in the purchase contract.4) On the basis that the purchasing entity is a Corporate Trustee then the Trustee can elect to distribute profit to the Beneficiaries. These may or may not be family members. They may indeed be a Pty Ltd Company or other Trust.
There are a couple of other points but it is getting late and i have half a dozen emails from forum members to answer tonight.
Richard Taylor | Australia's leading private lender
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