Ask Ban Tacs Question
What does it mean in tax terms to "introduce" vacant land held for a long time )but not pre-CGT) jointly by husband and wife to a business entity in a serious unit development when the business entity is a 50-50 family partnership comprising only husband and wife that has come into existence when it was required to be registered for GST?
What are the CGT and income tax consequences of the introduction?
Answer
A partnership is not a separate legal enity from you and your spouse so the property has not changed hands. Introducing it to the partnership is not a CGT event ie will not trigger any tax.
The catch is the property is then held as part of a business so normal income tax rather than CGT will apply to the profit from that point onwards. The land is introduced to the profit making venture at its market value immediately before the business began. So when working out the tax you will pay on the sale of a unit you deduct from the sale price (net of GST)the construction costs, selling costs etc and the unit’s share of the market value when the the business began. This amount is then included as business income, possibly reduced by other costs such as admin and interest, in the partnership’s tax retun, then the remaining profit is distributed into the partners’ individual tax returns as partnership income to be taxed at their marginal rate. In addition at the time the unit is sold (not at the time the land is committed to the business) you make a capital gain on the difference between the units portion of the orginal cost base and market value when committed to the business, this is also split between the owners of the land and included in their individual tax returns as a capital gain which will qualify for the 50% CGT discount before it is taxed at their marginal rate.
