Ask Ban Tacs Question
I’ve read Winning Property Tax Strategies (thanks!) and our situation is similar to the example “One property, two friends, two homes” provided on pages 177 to 180.
For context… I am a property developer. My brother and I are starting up a residential building business together to build our own development projects.
My brother and I are looking to purchase a vacant block of land together. The plan is to subdivide the block and build 2 townhouses. My family will move into 1 of the townhouses as our PPR, and my brother’s family will move into the other as his PPR.
The example provided in the book is buying in our own own names as tenants in common to enable us to to then later transfer the other’s half share to each other and use the PPR CGT exemption if we later decided the eventually sell the completed townhouse after living in it. This all makes sense.
We may be able to access more funding options from alternative lenders for the land purchase if we purchase the land in either a trust or company.
I am wondering if there is strategy that would enable us to purchase the land in a structure then later still give my brother and I the ability to utilise the PPR CGT exemption for the completed townhouses?
Thanks heaps 🙂
Answer
Too easy, no there isn’t any that will give you everything you want!
Basic case https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-110
Section 118-110 makes it very clear that a property can only be covered by a main residence exemption when it is held in an individual’s name. There is an exception in the case of a bare trust but that won’t help your situation as there can only be one beneficiary.
If you must go down the path of a company or a trust, then you could consider transferring it from the trust or company once the subdivision has finished, if that means your borrowing position has improved because the construction is finished. But then you lose all chance of covering any of the profit to that stage by any main residence exemption or the 50% CGT discount and GST will apply. The transfer must be at market value and the profit will be stuck in the company (top up tax to get it out) or distributed to you as income through the trust. A very very bad outcome just to make it attractive to some very unattractive lenders. The lenders that want companies to get around the responsible lending laws generally charge very high interest rates. Where as the big banks love equity in your own home and are offering extremely low rates, though I have heard that some aren’t even lending for construction anymore.
Here is a link to a webinar I did only the trouble a family had covering a couple of units they built with their main residence exemption. https://www.youtube.com/watch?v=usW1zL6QwdA&t=7s
If you would like to know all the nitty gritty on petitioning here is a link to a blog I wrote a few years ago. https://www.bantacs.com.au/newsflash-317/
I don’t know enough about your circumstances to offer a complete solution but if I did I would be looking for ways that you could own in your own names even if you had to pay high interest during construction and then refinance. In the meantime to be on the safe side neither of you should register for GST either individually or in partnership with each other. I worry for when you eventually sell your homes down the track and you and your brother are developers. Afterall it is still going to be the first sale of residential premises so subject to GST if part of an enterprise and the owner is registered for GST. There is a carve out for rental properties held for more than 5 years but nothing for your own home other than the argument that it was not part of your enterprise but as you can see from that webinar, it is not a given.
