CGT considerations for development

Question

Hi Julia,
I own 4 properties in Australia. All of them are in South Australia.
Please note that in some cases I have referred to myself as the “Husband” below
Below are the ownership details for the 4 properties:
Property Purchase year Current Mortgage Ownership % Taxable site value (for land tax)
A _ Investment Property 2008
(before marriage) $125,000
50% Husband
50% owned by a friend 120k
B_Personal Place of Residence 2009
(before marriage) $250,000
100% Husband 210k
C _ Investment Property 2011
(after marriage) $370,000 60% Wife
40% Husband 270k
D _ Investment Property 2012
(after marriage) $315,000
90% Husband
10% Wife 285k
As you can see above, 2 of the 4 properties (C&D) are owned by same entity (me and my wife) and hence I have to pay approx. $1200 per year in the form of land tax.
Property D was bought in March 2012. Rented by the previous owner for 6 months (until Sep 2012) and rented out again to another tenant until March 2013. However, the tenant stopped paying rent from January 2013 and even got Housing SA to do an inspection. Housing SA provided me a list of defects to fix and later fixed the maximum rent I can charge to $104/week. Considering the costs to get the property fixed, I decided to instead subdivide. Currently, I am in the middle of subdividing this property. The subdivision has been approved, but the house is yet to be demolished, pegged, etc. before applying to the LandTitlesOffice for separate titles. I intend to construct 3 houses on the subdivided allotments and rent them out after construction. Based on a total loan of 850k and expected rent of 350 per week, I believe the properties will end up being negatively geared but positively cash flowed (after considering depreciation and other expenses).
After subdivision I imagine the land values for the 3 new allotments to be in the range of 160k-180k each. This means that, we will end up paying a considerable amount (approx. 5k per year) as land tax in future. Hence, I am thinking about getting the 10% share transferred to my name during subdivision i.e. have all 3 new titles under my name, so that it will cost me less stamp duty (whatever is applicable for 10% value) and I will end up paying less land tax.
Can you please advise if what I am doing is correct and if there are any other important considerations i.e future tax implications, etc that I should know of now? Please find below some questions that are more specific.
• CGT event: Do I need to capture the current value of the property? If yes, when – before/after demolition? What should I do to capture the current value? Is a valuation necessary? Who should I get to do it – a real estate agent, registered valuer or the council rates notice is good enough? I bought the property in March 2012 for 315k and the current council rates invoice values the property at the same value i.e. 315k.
• If in near future we decide to sell one or more of the newly constructed houses, what should I do now to ensure minimisation of tax (especially by claiming the fact that I made the decision to subdivide because of the Housing SA event)?
• Can you advice the best way to minimise land tax? Should I do as suggested above – transfer 10% from wife to me OR vice versa OR should consider something else and what?
Please note:
• Our current incomes Wife – 65k per year, me – 95k per year
• I intend to expand my property portfolio in future and might choose a subdivision path again.
• Currently it is just me and my wife. We do plan to have children in coming 1-2 years.
• I do have a younger brother (low wage overseas) and parents (overseas and retired). I am okay with them being beneficiaries if it helps to minimise tax in future.
If you consider the above question as a more detailed on please let me know your fees.
Thanks

Answer

Yes you can claim the interest during construction as long as you intend to use the final product as a rental property

I said that you can’t do anything until you subdivide because before that you only have one title. I read that question was about subdividing property D into two properties with one in each name. This couldn’t be done before subdivision because you only have one title, who’s name would you put it in? And then you would still have to change the name on one title when it is subdivided. It was just a practicality comment.
But now with this latest question you seem to want to have all three properties developed from property D in your name so yes you could do it before subdivision and it would be the cheapest time.
I can’t follow why you think transferring your wife’s 10% in property D will reduce your land tax. But I am not covering land tax here anyway.
The valuation on the council rates is probably the unimproved land value and these values are usually a little below market.
The only time you will need a valuation is if you change the ownership. If the change puts 100% into your name then you can do it before any subdivision, it is just a question of picking the time that it will be at its lowest value for CGT and stamp duty purposes. This maybe just after the house is demolished but will council let you demolish before approving the subdivision? The subdivision approval is going to increase the valuation considerably. A registered valuer is best but if you ask a real estate agent for recent sales and are being fare the ATO will probably accept that.
If you sell one of the properties the ATO is going to argue that you developed with the intention of selling. You could try to argue that you had a cost blow out and needed to sell but if the numbers didn’t stack up from the start then it is obvious that you intended to sell one to be able to afford the project. If you are considered to have built the property you sell with the intention of selling, then no 50% CGT discount on the gain above the original land value and you will have to charge GST on the sale which will really eat into your profit. If you are not registered for GST then keeping it for a few years will mean no GST on sale and the 50% CGT discount. If you are registered for GST it has to be 5 years continuous rental before you can sell without paying GST.
It would take a proper consultation to consider you best tax strategy but I would like to point out (ignoring land tax) that if you never sell you never pay CGT or tax on Business profits or GST. If you are going to do further developments in the future you need to look at your goals. If it is to own 10 properties why not keep these?
It is a bit different if you decide to buy another property then it is not a case of incurring costs just to change ownership. This is where you can make a difference for example buying in another state so you qualify for a new land tax threshold. Also consider using a SMSF there is a free booklet about this on our web site http://www.bantacs.com.au/booklets/SMSFs_Booklet.pdf certainly the best tax rate and asset protection you can get but not that good an idea when you are so young and life is still so uncertain ie what you will want for your children before you reach retirement age and can access your super.
As for parents and brother overseas they will not be entitled to the 50% CGT discount or the initial tax free threshold.

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