In 1998 my father and I formed a company to buy a duplex, so that he could live in one half, and I could rent out the other. The Company Title arrangement had a big advantage over joint tenancy since it allowed me to deduct the whole of my mortgage and running costs, and my father was not obliged to declare half the rent. We are the only directors and shareholders of the company that holds the single title.
Unit A (my father’s) has been his primary residence for the whole period.
Unit B (mine) has been continuously let as a rental property.
I want to buy out my father’s unit (he’s moving into aged care), do some renovations, sell both halves and wind up the company.
If I buy Unit A from my father he is exempt from CGT through the primary residence exemption.
If the whole property is then sold my cost base is (the amount I pay for Unit A + my original costs for Unit B).
Thus I end up paying CGT on the gains on Unit B since 1998 plus any gains on Unit A after I buy out my father.
That’s fair, but what happens when the company is wound up? The company is the actual owner of the property. Does it then have to pay CGT at 30%, on top of the amounts I pay? How is this double tax avoided?
Thanks Julia. Things are a bit clearer now, although still disappointing that there is a significant double taxation. And I should have given you some $ amounts to work with. Your guess of the purchase price is correct but the property is now worth about $1.4 mil total.
A couple of follow up questions though.
1. Since the Company bought the property pre Sept 1999, isn’t it able to index the cost base by CPI (108/67.5 = 160%)? Same with my shares in the Company (although I would have to choose between indexing and discounting).
2. I want to be fair to my father (and ultimately his other heirs, my brother and sister) but shouldn’t the value of the shares I buy from my father be reduced by this impending CGT liability? Using your figures I should pay him $60,000 less. Right?
3. If, after buying my Father’s shares, I do some significant renovations to add value before sale, who should pay? me or the Company?
If it’s the Company where does it get the money? (issue more shares to me, or borrow from me or a bank?)