subdivision

Question

Hi Julia

I typed out my question and pressed submit and it all disappeared. Here goes again.

Can you please advise on the following. If we sold the battle axe block that I wrote about previously…rather than build on it, what would be the tax position be please? I don’t think gst would apply to the sale of the land or the house, but please advise if it would.

We would keep the reno house. What would the cost base and profit for the reno house and the land be please?

Assuming land was valued by a valuer at 600K and old house 120K and the costs were ..

720 buy
28 stamp
2 solic
40 DA
42 council requirements
80K reno
——–
912K total cost

Land sell for $410 less $13K selling costs(incl of gst)=
$397 net proceeds
House sell for $585 less $18k selling costs(incl of gst)=$567K

If we demolished the house and sold two side by side blocks with street frontage (more valuable this way)I presume that gst would still not apply. Is this correct?

Thank you for your assistance

Answer

Ok let’s first consider why I think GST applies. The key problem is
you have only just bought the property so it would be very difficult to
argue that you did not buy with the profit making intention. When it comes
to the renovated house (assuming not substantial renovation) the situation
is different because second-hand houses are not subject to GST. If your
turnover of items subject to GST exceeds $75,000pa you are required to be
registered for GST. If you are registered for GST then you must charge GST
on the sale of vacant land or the first sale of house and land that is part
of your enterprise.
So if you demolish the house you will be replacing a GST exemption
property with one that will be subject to GST. This means that the two
side by side vacant pieces of land would both be subject to GST.
MT 2006/1 is the key ruling on this topic its approach is a bit
confusing. When it says you are entitled to an ABN it means you are
considered to be an enterprise therefore if your turnover of supplies
subject to GST exceeds $75,000 you are required to be registered for GST.
Here is a link to MT 2006/1 http://law.ato.gov.au/atolaw/view.htm?Docid=MXR/MT20061/NAT/ATO/00001
scroll down to paragraph 262 in particular the examples given in
paragraphs 270 to 276 and 286 to 287 but note in this latter example the
only reason it suggests that GST would not apply if they simply sold the
subdivided land is because they had owned the block for so long.

Ok now over the nagging and into the question adapting the figures from my
last answer:
Assuming that one block does not have anything more going
for it than the other ie views then you can just apportion the $600,000
between the blocks by dividing it by 12 and multiplying it by 5 for the
smaller block and multiplying by 7 for the larger block to be used for the
new house.
the $720,000 purchase
price is apportioned $350,000 to the battle axe block and $370,000
for the reno this works out at 49% block and 51% reno. I used this
ratio for the solicitor and stamp duty. I have just split the council
requirements but you could look closer at them for items particular for
each block ie water connection may only be necessary for the battle axe
block.
You will note that I have reduced the DA, council
requirements and selling costs for the battle axe block by 1/11th on the
assumption all costs will be subject to GST which you will claim back.
You
could consider claiming the GST back on part of the solicitor’s costs to
buy

Reno Battle Axe Block
Original Purchase land $250,000 $350,000
Original purchase house $120,000
Solicitor & stamp duty $15,300 $14,700
DA $20,000 $18,182
Council Requirement $21,000 $19,091
Reno $80,000

Selling Costs $18,000 $11,818
GST payable on sale* $5,455
————- ————-
Cost Base $524,300 $419,246
Selling price $585,000 $410,000
Profit $60,700 ($9,246) Loss!!
Note this land would make a loss yet you would still be subject to Net GST
of $545.
*Assuming the buyer agrees to the use of the margin scheme the GST on the
sale price would be calculated as follows:
Margin between purchase price and selling price $410,000 – $350,000 =
$60,000
GST payable on 1/11th of the margin $60,000/11=5,455
Meanwhile you got back GST input credits of
DA $1,818
Council Requirement $1,910
Selling Costs $1,182
————-
$4,910

Net GST payable $545 but also no 50% CGT discount on the profit

Obviously no tax paid on the loss for the land and as it is an enterprise
you could use it as a deduction. If you keep the house then when you
eventually sell it you will only be subject to tax on $30,350 because of
the 50% CGT discount.

The two pieces of land side by side would certainly have to be worth a lot
lot more to justify losing the house and thus triggering GST.

Please remember my answers are limited by the information you provide,
consider that I do not know all your circumstances and ultimately you
should consult with your Accountant