Ask Ban Tacs Question
Hi,
Three family members with no PPR are looking at purchasing an existing house which is in an area that would allow the building to be replaced with three strata homes. I need to know how to do this with minimum costs (minimising stamp duty, GST GCT etc) . I see complications in the purchase of the existing house and wether that needs to be in three names (some with finance others with family loans) and then the survey and splitting (selling?) of land and building in individual names such that each member can sell or rent their own property as their situation dictates. Could you advise?
Answer
Sorry I cannot address the stamp duty part of the question because that is a state tax. I will answer the GST and CGT in turn. Firstly I just want to point out that I am assuming that when you say “each member can sell”, this is an eventual sale, not building for the purpose of selling. I am assuming that none of them are entering into this arrangement for a quick turn around.
The property would definitely need to be purchased in all three names to avoid GST and CGT. They will have to guarantee each other’s loans. You say strata and that draws me to the conclusion that the property cannot be split until after the buildings are completed anyway.
GST
It is my opinion, based on the information you have provided that GST will not apply because there is nothing about their activity that could be considered to be in the furtherance of an enterprise. GSTR 2009/2 is the ATO ruling on partitioning – when co owners split a property and change the ownership to individual ownership of the individual lots. I think example 5 fits their circumstances rather well. Note the reference to only minimal activity. You are certainly talking about more than minimal activity by building units. Now I assume (strata laws do vary from state to state) that the individual ownership will not happen until the strata is in place which would require the building to happen first. Example 6 of the ruling covers a situation where the building happens before the transfer and it still does not create a GST liability for the owner who does not intend to sell her house. This also shows how if one of these family members is entering into the arrangement for the purpose of selling the property upon completion then GST would apply. So it is just a matter of checking everyone’s intention. If they are not going to sell then even building will not trigger GST on the transfer because it is not an enterprise.
GSTR 2009/2
http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR20092/NAT/ATO/00001
Example 5 – Supply not in the course or furtherance of an enterprise
73. Rohan runs his own profitable business as a personal trainer. In July 2003, he and his sister, Roma (who does not carry on an enterprise), purchased land as tenants in common in equal shares. Both Rohan and Roma use the land to carry out a primary production activity as a hobby .
74. In July 2004, Roma wanted to build a house on the land in which to live. Rohan and Roma agreed to subdivide the land into 2 lots because Rohan wanted to continue the primary production activity. Rohan agreed to take Lot 1 and Roma agreed to take Lot 2 .
75. Rohan and Roma arrange for the land to be surveyed. The land had a road running along its boundary and had some existing services such as electricity. Only minimal activity was required to subdivide the land .
76. Rohan and Roma each transferred their interest in part of the subdivided land to the other to give effect to the partition. The transfer by Rohan of his interest in Lot 2 to Roma is not made in the course or furtherance of the enterprise he carries on. Roma’s transfer of her interest in Lot 1 to Rohan is also not in the course or furtherance of an enterprise .
77. The partition is the division of an asset which does not have a connection with the business carried on by Rohan as it is not applied in his enterprise. His hobby activity, which is a separate and distinct activity from the business, is not an enterprise. Roma also does not carry on an enterprise on or in relation to the land .
Example 6 – Supply in the course or furtherance of an enterprise carried on by one co-owner and not the other co-owner
79. Two friends, Caroline and Shaun, purchase a block of land as tenants in common in equal shares with the intention to subdivide the land, to construct two houses and to take a house each .
80. Caroline’s intention in entering into the arrangement is to use the house she acquired as her primary residence. Caroline is not carrying on an enterprise in these circumstances. In Caroline’s case, the purpose of the arrangement is private and domestic in nature .
81. Shaun’s intention in entering into the arrangement is to sell the house he acquires for a profit. Shaun is carrying on an enterprise in these circumstances because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade .46
82. Shaun and Caroline agree that Shaun will take Lot 1 which includes House 1 and Caroline will take Lot 2 which includes House 2 .
83. Caroline and Shaun give effect to the partition, after the completion of construction, by Shaun transferring his interest in Lot 2 to Caroline and by Caroline transferring her interest in Lot 1 to Shaun .
84. The transfer by Caroline of her interest in Lot 1 to Shaun is not in the course or furtherance of an enterprise she carries on. Caroline’s transfer of her interest in Lot 1 to Shaun does not have any connection with an enterprise that she carries on .47
85. In contrast, the transfer by Shaun of his interest in Lot 2 to Caroline is in the course of furtherance of an enterprise he carries on.48 Shaun’s transfer of his interest in Lot 2 to Caroline is connected with his enterprise of selling new residential premises49 for profit .5
CGT
It is great that you are using a strata plan to separate the properties. This will allow you to utilise section 118-42 ITAA 1997
118-42 Transfer of stratum units ITAA 36
If:
(a) you own land on which there is a building; and
(b) you subdivide the building into *stratum units; and
(c) you transfer each unit to the entity who had the right to occupy it just before the subdivision;
a *capital gain or *capital loss you make from transferring the unit is disregarded.
In short this means no CGT will be triggered on the transfer between co owners, it will be rolled over.
