We have a discretionary family trust where my husband, myself, our daughter and one other individual are the beneficiaries. We also have a building company of which the family trust is a shareholder. We demolished a property the trust owns and developed the land into 4 units. The building company was the builder. Can the family trust get discounted CGT if selling one of the units at this property that has held now for 12 months, or, is the building company too close in relationship to the trust for us to get the discount?
Here is a link to my how not to be a developer booklet http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf it might be helpful when you read my answer and go but but but…
Even if the units were built buy an independent builder you are still at risk of GST applying and no 50% CGT discount. It is a question of whether you are an investor or in business to make a profit from selling the units rather than renting them out. Even if you build most of them to keep the one you build with the intention of selling will be subject to GST and on CGT discount. What was your primary purpose when you started the project? Did you buy the property with the primary intention of building these units to sell? Even if it wasn’t your intention at the time you purchased the property the next question is when you started to build the units did you turn the property over to a business venture. The counter argument is that you were merely realising an asset, as discussed in the booklet. The trouble is the actual construction of a building is more than merely realising an asset whether the owner does so itself or contracts a builder to do it.
The only way the trust would be considered not in business when the units were built is if it was building them to rent out. If this is the case then their eventual sale, much later down the track would be considered merely realising an asset so CGT would apply which means the 50% CGT discount. If and only if they are sold down the track after having built them with the intention of holding as an investment GST will not apply if the trust is not registered for GST or they have been held as a continuous rental for at least 5 years. Note the trust should not be claiming any GST input credits on the construction costs if they are not built with the intention of reselling.
The onus of proof of your intentions rests with the taxpayer. The shorter the period of time between construction and sale the more it looks like your thoughts were to sell from the start. The best defence is to have a change of circumstances that created the need to sell, which was not part of the plan when you started to build. The fact you are in the building industry works against you.
It is important to address this issue, even get an ATO ruling before you sell because GST puts you in a bit of a catch 22 situation. You see if you accept that you are subject to GST on the sale then you can put a margin scheme (discussed in the booklet) clause in the contract which will considerably reduce your GST. You can’t of course put this clause in just in case GST applies. If GST applies then you will certainly not be entitled to the 50% CGT discount.
See your Accountant who understands your circumstances fully, before you list this property to sell and if there is any doubt it is worth applying for a ruling.