I have a client who purchased her property in 1992 for $200,000. the market value today would be around $1,000,000
She has lived in the property for the entire time and now wants to develop the site by way of a Duplex selling one and living in the other.
The costs of the development would be $1,000,000 and the selling price for the surplus townhouse would be $1,300,000.
She is 68 years of age and on a pension
This how I think it would work,
Original purchase price $200,000 so the land subject GCT $100,000 so market value $500,000 less $1000,000 original purchase price = $400,000 less 50% $200,000 less interest payments on mortgage, rates and maintenance.
Could you advise if my assumptions are correct?
The property is in Melbourne Vic
The key here is that the property owner is about to enter into a profit-making venture. As I understand it she is engaging you to build a duplex and will pay you $1.3mil to do so. You are prepared to wait for the unit to sell before you get paid. This is the simplest way of doing it and best tax-wise too. Any changing of the title would just lead to extra stamp duty costs. There are some joint venture options but they only complicate the matter and risk the ATO treating you both as in partnership.
Please correct me if I have the facts wrong.
So you will invoice her for say $650,000 including GST for each unit and you will claim GST input credits on all of the construction costs.
One $650,000 invoice will be for her unit so she will not be able to claim the GST back as an input credit. As long as she moves into that unit asap after completion she can roll her main residence exemption all the way through from 1992 to now.
But the other unit will have no main residence exemption, not even for the period of time the land was under her original main residence. This land, initially a capital asset, will have a change of purpose to trading stock. She has the choice of market value or original cost to bring it into account in the “business” The gain before the change of use is entitled to the 50% CGT discount so it is in her interest to bring it into the business at market value. This means paying CGT now, at the time of change of purpose before any sale proceeds are received. The gain would be considerable, assuming the split is exactly half, then the cost base is $100,000 (there is no reduction whether the house is there or not) plus stamp duty and legals to buy. Section 110-25(4) allows this to be increased by half of all the holding costs since 1992 such as interest, rates, insurance, repairs, lawn mowing, cleaning materials etc. The market value would be before any development so just half of what the property is worth now. After that half the subdivision costs and your $650,000 are added to the market value now as the cost of the property she eventually sells for say $1.3mil, even though she may give all the proceeds to you, she will be up for normal income tax on that part of the profit.
References ITAA 1997
Section 110-25(4) https://www.ato.gov.au/law/view/document?docid=PAC/19970038/110-25
GST – With regards to the unit being sold – It is the first sale of new residential premises so is subject to GST. As this is a one-off business venture for the property owner it is part of her turnover, so more than $75,000 so she is required to register for GST. She will be entitled to use the margin scheme if the buyer agrees, she will also be entitled to claim back the GST credits on your invoice and any subdivision costs, for the unit that she is selling.
Good on you for getting the right information for her. We have an office at Ascot Vale if she would like some independent advice. Please consider that the above is general, she needs an Accountant to drill down the numbers. She will also needs advice on how this will affect her pension.
Our Microsoft 365 glitches are all sorted and I did get a hold of your original question which I have answered here. I notice in your other email that you say about a clean skin company doing the build. It is only necessary for you to be the owner/shareholder of that company and just invoice the property owner for the whole construction. I see the agreement as being one of construction with delayed payment but you use the words “Profit Share and Project Management Agreement”. This does worry me. Is it just that the price set for the construction contract is $x (to cover build costs) plus % of sale price of on unit? Which is fine. Just don’t want to see anything that suggests you are entitled to a share of the sale proceeds as that suggests a partnership has formed which could be a GST nightmare. If you need security I suggest a caveat over the property.