Tax consequences of buying a rental but to subdivide and sell

Question

Hi guys, I’m looking at purchasing an established investment property this year, which I plan to subdivide into a battle axe configuration. With the result being the existing property and land at the rear. I’m looking at the numbers for selling just the land as a house and land package or building a unit and selling the unit.

Are you able to guide me what structure would be best to purchase the property (company or personal name?, do I need to register for gst?) and the tax I’d be liable to pay upon? (Gst,CGT?)

Selling the vacant land as a house and land package.
Selling the vacant land.
Building a unit and selling the unit.

The selling would take place more than 12 months after I buy the investment property.

Note* I will be having my parents on the mortgage, but I will be paying all the interest repayments, rates and subdivision cost’s. They are just on the mortgage so I can get the serviceability to purchase the existing property.

Thank you kindly for your response.

Answer

I have answered your question but I fear there is more to it and more options than you have considered and you might like to have a Zoom meeting with me to kick around some ideas https://www.bantacs.com.au/shop-2/consultation-with-julia-hartman/

Assumptions:

Because you have not mentioned it I am going to assume you do not intend to live in either property
When you say house and land package you are saying selling the original house and part of the original land
Your parents’ name is not on the title even though they are on the loan, something banks are not normally happy to do.

So based on just what you have said:

The sale of an established home on land it has always been attached to is not subject to GST, providing it is not substantially renovated, so you will pay no GST on the purchase and not have to charge GST when you sell that established house with some of the original land attached.

As for the sale of the vacant land or that land with a unit built on it that is either the first sale of new residential premises or vacant residential land that is part of an enterprise ie purchased with the intention of developing and selling at a profit. This will require you to register for GST, you will be entitled to us the margin scheme when you sell and claim input credits on the construction and half the subdivision costs. This is a better option than the ATO coming along later and saying we want the GST when it is too late to put a margin scheme clause in the contract (which you can only do if you are already registered for GST) and too late to claim the GST input credits back on the construction costs (4 year limit).

The only carve out would be if you built the unit and held it as a rental for 5 years, then it would be considered an established house as discussed with the original house above.

Now the big issue is tax. You see if you buy a property with the intention of selling it for a profit rather than hold to live in or hold as a long term rental then you are in a profit making enterprise. This means your profit will be taxed at normal tax rates, no 50% CGT discount so the 12 months hold is not relevant.

You can see it is all about proving your thoughts and the onus of proof is on you. The ATO would look at the fact you could probably not afford to pay the loan back without doing the development or that you told the bank you were going to do the development to persuade them to lend you the money. Building the unit makes it worse, you can’t even say that you didn’t want so much land to maintain so was merely realising an asset as best you could. Building a unit crosses the line to business like but so anyway does buying with the intention of selling for a profit.

Now in answer to your questions:

Are you able to guide me what structure would be best to purchase the property (company or personal name?, do I need to register for gst?) and the tax I’d be liable to pay upon? (Gst,CGT?)

If you intend keeping one of the properties to live in it will need to be in your own name to qualify for the main residence exemption. If you intend keeping one of the properties as a rental it should not be in the company name because companies do not qualify for the 50% CGT discount. If you are going to build then there is some risk associated with the process and owning a building site so you may not want to hold it in your name but if you think you might end up holding it or part of the property as a long term rental you will not want a company either. The third option is a discretionary trust that gives you some asset protection and still the 50% CGT discount but not the main residence exemption.

If you change the name on the title when you subdivide ie one in your name and one in the trust, that will be treated as a sale.

Selling the vacant land as a house and land package. No GST on an established home but the vacant land or newly constructed unit would be subject to GST because you bought with the intention of developing for a profit. And for this reason no CGT discount either.
Selling the vacant land. If sell vacant land rather than – build and sell new unit, there is a chance you could argue not an enterprise but just a lawn reduction project, but I would get a ruling that the ATO accept this before you sign a contract that will give up your rights to use the margin scheme.
Building a unit and selling the unit. Definitely GST and no chance of 50% CGT discount as clearly and enterprise.

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