Ask Ban Tacs Question
I currently own an apartment in my own name. I originally lived in the apartment and then moved out and rented the apartment (qualifying for the main residence exemption). I now live overseas and am caught by the governments latest changes which remove my CGT benefits if I sell the property while a non-resident. A developer would like to purchase the block that my apartment is on and obviously I would like to have a contract signed before June 30, 2020 to be able to avoid CGT (I believe I only have to have a contract signed). I imagine negotiations with a developer could take longer and as such I wanted to know if a CGT event would be triggered if I was to negotiate a new for old swap on the apartment with the developer. The apartment block would change from 5 stories to 10 stories but I myself would still only own 1 apartment. Can you advise if a CGT event is triggered?
Answer
I need to know more about the contract they are offering you. It might just be a contract to build a new block in return for getting the sale proceeds from some of the units or the developer might want part ownership for security. It is the contract to actually transfer title that will trigger a CGT event but that transfer may not be of your main residence anyway. Note also possible GST liability for you too.
For example if the developer buys your old unit off you for $X and agrees to sell you the new unit for $X then it is pretty straight forward and main residence exemption covers your sale to the developer. Careful if you are still overseas when the new unit is settled, you have no chance of covering it with your main residence exemption before you come back to Australia. Nevertheless, this arrangement is probably the best for you.
If the agreement with the developer is that all the original owners continue to own the property when it is demolished then all owners are tenants in common in the land but if you sell to the developer at this stage no main residence exemption because no dwelling on the land. At this point in time all owners would just be tenants in common in the land and may be eligible to use section 118-42 1997 ITAA to get rollover relief into their new unit. But how does the developer get the sale proceeds from the other units that now technically belong to the developer if there is no title change at this point in time? Do the owners sell the other units on behalf of the developer, to third parties, to pay a debt owed to the developer for the construction? If so that is a CGT event and GST so watch out.
Or at completion do the owners just transfer ownership to the developer? That also is a sale – CGT and GST but high stamp duty consequences so unlikely.
I agree with you that it is only a matter of signing a contract before 30th June 2020. But what is that contract for? How does the developer intend getting their profit? What are you agreeing to? Is it a contract for a sale at all? It may well be a contract for a joint venture where you agree to hand over sale proceeds of the extra units as payment for the construction of the whole building. You must get legal advice as to what you are getting yourself into here for lots of good reasons. Part of that legal advice should be when there is actually a transfer of ownership, what is transferred and to who (the developer or a third party sale on the developers behalf). Then you should be able to get an idea of which example above you fit into. After that it is also important that you get tax advice regarding GST and whether the main residence exemption can apply at all.
Some states have laws that force owners to agree to sell to a developer if a certain percentage of the owners have already agreed. This may affect you ability to negotiate. Big issues you need legal advice from a strata expert.
