In January this year (2012), we relocated from Melbourne to Brisbane to be nearer my parents due to their deteriorating health. Previously I have flown up from Melbourne for all my parents major medical appointments as I have a strong connection with my family.
On a visit at Easter 2011 after toying with the idea of relocating over the years, we found and purchased the property we now reside in.
It is a 2.5 acre (10,200 m2) property in Bracken Ridge zoned ‘future urban’. The house is a large brick veneer house with little work done to it since it was built in 1984. It has a self-contained unit on the site.
A conditional contract was placed on 11 Childs Street, Bracken Ridge on 23 June 2011, with settlement to occur on 5/12/11. Due to circumstances an extension was sought for the contract but our Qld conveyancer and the vendors solicitor were unable to connect, so a new contract had to be signed on 24 October 2011 with settlement on 12 January 2011.
Prior to purchase we were aware that there was a Development Application (DA) on the property due to expire on 29 June 2011. We (with the owners’ written consent) applied to have this extended. The DA does not maximise potential lot yield so we also started the process of applying for a new modified DA with increased lot yield at the same time (before settlement). We are endeavouring to maximising lot yield with a new DA (likely to be 11-12 lots or if we demolish the house 16 lots) and it is likely that the old DA (7 very large lots) has lapsed.
The purchase price for the property was $1,290,000. The bank valuation at the time of purchase was $1,250,000 but clearly stated it did not take into consideration the potential for development.
The property is in our joint names.
Our loan structure is loan total $600,000 with $360,000 in redraw and owing $240,000. This is not a business loan. The loan is attached to an account which we do not use for everyday use but have used to pay preliminary development costs e.g. town planning and Brisbane City Council (BCC) as well as a very small emergency cash withdrawal.
I have been on long services leave and I am now commencing employment with a Qld community service organisation.
My husband is a psychologist and has been a sole trader for many years in Melbourne. One of the attractions to this property was that my husband could practice from the self-contained unit on the property – he has registered with Medicare at our address and has started to market his business, he has not yet seen any clients.
Through the planning process, the BCC have been clear that they will take approximately 2000 m2 of our land for continuation of park land (we are of course seeking to reduce this with the new DA but we aren’t very hopeful).
The estimated cost of development is upward of $80,000 per lot with prospective sale price per lot to be between $270,000 to $290,000.
We have two investment properties in Melbourne.
I am 44 years of age (1968) and have approximately $100,000 in superannuation.
My husband is 51 years of age (1961) and has approximately $70,000 in super.
We have two primary school aged dependents. There are two older independent children residing in Melbourne.
We have never developed property before.
What is the best structure for us to progress this project?
How do we minimise our tax liability?
Is the tax payable on selling the blocks considered capital gains tax or income tax or other?
If we demolish the house how much land would be considered primary residence (2170 m2 on the current DA is set aside for the primary residence). What are the tax implications of doing this?
How do we make sure that the debt is shifted to the land should we develop?
If the house is to remain (not demolished), when do we get avaluation of the house and land for tax purposes?
How do we configure the debt to the land not the residence?
What happens with GST? Do we need to register for GST?
We have a joint ABN from a business idea a few yews ago that never got started. Does this remain active and do we need it?
Here is a link to our booklet, How Not To Be A Developer http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf It is certainly worth while you reading it. Further, it will explain in more detail everything I mention here because your question is way over size so I will be brief on each point. Of course you realise you will need to consult an accountant before you go any further, you need to have a detailed plain and costings. Many first time investors don’t end up making a profit. GST is huge and it is not a percentage of the profit just a percentage of the selling price. There is many a first time developer left with a huge GST bill with the ATO after the bank took all the sale proceeds because the development actually made a loss. Scared you enough? Sorry but it is dangerous territory you are venturing into. I have only done a very small subdivision once, the costs were huge and it took 2 years. Yes I made a profit and avoided the GST so it was ok but that is only because I bought the land more than 10 years earlier. You appear to have already paid a small premium for the development potential now it is up to you to manage this carefully like any business to be able to make a profit. Ok enough nagging.
There is no doubt that you have bought this property with the intention of developing it for resale. You may cover the house with your main residence exemption and the office with the small business concessions but the rest of the property will not be able to be covered by your main residence exemption because it is your intention to sell it separately from your home. The main residence exemption only stays with the dwelling and any land (under 5 acres) that is sold with the house. Demolishing the home won’t help this either as that simply losses the whole main residence exemption right back to the day you bought the property.
Further, the land is not going to qualify for the 50% CGT discount because it is not the sale of an investment it is the sale of land you purchased for resale, business income taxed at normal rates. You own the property in joint names so the profit would just be split 50:50 between you . IF you were to put the property into a more tax effective entity you would be up for stamp duty again and would not be able to cover the home with your main residence exemption because it must be in your own name to do so. If you were to subdivide and then put the land into a more tax effective entity this would be a taxable transaction anyway at market value so you would be paying tax on all the profit at that point rather than when it is sold to third parties and of course at this earlier point you do not have the cash to pay the tax.
The sale of the blocks will be subject to GST and you will be able to claim back the GST on the inputs such as consultants, council fees may not have GST in them. Providing the purchaser agrees in writing you can use the margin scheme to reduce the GST on the blocks to the margin between their share of the purchase price and their selling price. For example if you sold for $320,000 and the block’s share of the original purchase price was $100,000 then the GST on the block would be $20,000. If that blocks share of the development costs that were subject to GST was $88,000 then you would have got $8,000 back from the ATO during the development so the net GST on the block would be $12,000.
You need to register for GST, Your old ABN is probably no longer active but they will give you the same number.
There is an old case that you could use as a precedent to argue that the loan is for the land that is to be developed not your house. Most of the interest is going to be on the loan for the development costs anyway. Keep the original loan separate and have a separate loan to draw for the development costs of the blocks. Note that some of the subdivision costs will be associated with the house. For example the cost of it gaining an independent title. Don’t draw these costs from that loan.
You will need a valuation to apportion the original purchase cost of the property between the house, unit and development blocks. It is always going to be the original purchase price because you started out right from the start intending to develop. If you demolish the house you will not get any main residence exemption for the time it was your home, unless you build another one and then you will need to use the concession in ID 2003/232.
Using another entity to do the development is sometimes used to hive off some of the profit but this is really only even worth considering if you were developers ie contributing some skills to the project yourself and even then it would only be a reasonable markup.
This is just touching the surface, please get advice.