CGT on 50 Acres of Land Sold & Payment over 3 year (Need Help Please)

C

carlau

CGT on 50 Acres of Land Sold (Need Help Please)

Just sold 50 Acres of land and house which is on the 50 acres of land to a developer who wants to excise his Option that we signed years ago to sell him the land if he could get the area rezoned and developed and the company is going to excise the option and purchase the land early next year.

I've seen 2 Accountants regarding the "CGT" (Capital Gains Tax) on how much CGT we are required to pay and when are the payments to be made but none really have any experience in large property of 2 Hectares / 5 Acres.

I know that the tax office exempt 2 Hectares / 5 Acres if its your Main Residence "please correct me if I'm wrong".

Here is a break Down
-Bought the property just after 1999 and built a house on the 50 Acres.
-Land on which the dwelling is on, our Main Residence for the period we have owned it.
-No income is produced from land.
-Sale of land Profit of 2000% over 7 year period. I don't want to give a exact figure but its well over $5 Million.

Payment from Developer is over 3 years.
1st Payment 10%
2nd Payment (18mths) 30%
3rd Payment (36mths) 60%


Excuse my lack of knowledge on this as I'm only new and I've seen 2 accountants and none of them could give me a straight forward answer so I'm asking for your help and in search of a new accountant in Melbourne North- West any suggestions ?

Questions that I need answered.

1) When am I required to pay the CGT earned from the sale of the Land ?

2) Does the CGT need to be paid in partial amounts over the 3 year period as I receive my 3 payments or do I make a one off lump sum payment at the end of the sale ?

3) What amount would I be looking at paying in CGT working on a figure of $7 Million for this exercise and what could I claim as the rates have gone up by 300% and will continue to climb over the 3 years, could I claim the rates and what other items can I claim to bring down the CGT ?

Thank You.
 
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Because the land is over 2 hectares, you have only a partial exemption from CGT. I cannot find on the ato site any link for over 2 hectare sales so you may have to ring the ato to find the correct ruling.

As to payment in installments, I couldn't find land in that category, but I found shares which are roughly calculated in the same fashion. http://www.ato.gov.au/individuals/c...001/002/026/005&mnu=9278&mfp=001/002&st=&cy=1
Looks like the CGT gets paid all at once in the year the contract is signed.

You could take out a mortgage and finance the purchaser the full amount and charge interest on it. Do not release the mortgage until until after the final payment.
 
First question you really need to determine is whether it is on revenue or capital account. Prima facie you haven't done this sort of thing before so not in the business of property development but it could be captured as being an isolated transaction.

This all depends on the contract with the developer, the stages that have been completed and at what point in time the land will become trading stock.

It's a complex area and requires someone well versed in development.
 
Because the Vic Government late last year moved the Green Wedge Boarder and now its reserved for residential development and this is happening all around Melbourne, developers are trying to snap up the land that the government released.

None of the 2 Accountants that I've taken the option to has been able to calculate what is required and the amount to be paid in CGT.

So I'm in search of any good property accountants that deal with large sums and long term contracts of sale as this isn't like your ordinary sale.

But please keep your inputs coming in and thank you for your reply Brenda Irwin, coastymike.
 
This won't help you now carlau, but I fail to understand (as probably others on the fourm are also thinking) why you are trying to work out your position and what you can do a couple of years after you signed and entered into a contract.

I suspect you shall get whatever is coming to you, and there is little point trying to investigate what your options are. It'll be what it'll be.

Sorting out the CGT implications and whether the staged payments of the contract entered into are benficial to you or completely detrimental is neither here nor there now that the contract you entered into is legally binding.

These questions you have should have been ironed out well before you entered into the contract.

If it turns out well for you, you've been very lucky. If it turns out poorly and you end up with a massive CGT liability, then simply put it down to experience to check and double check every aspect of a contract before you enter into it.

Good luck with your endeavours.
 
No Contract has been signed as yet. Its just that not many Accountants and also you will notice on the ATO site there is not much information on CGT and what can be claimed if you have over 2 Hectares.

I know that my 2 Hectares / 5 Acres will be excempt from CGT as its my Main Residence, and all acountants have told me I do the 50/50 split and I will be taxed on the remaing 50% minus the 2 Hectares / 5 Acres which the house is sitting on.

Just wondering how and what can be claimed and when would the CGT need to be paid as I keep hearing two stories from 3 different accounts.

1) Payment of CGT can be paid at end of the 3 years.
2) Also from another Accountant, as payment is recieved then partial payment goes to CGT.

And there are ways of reducing the CGT which Im interested to know as there are many conflicting stories as to what you can and cant do and some accountants say yes and some say no.
 
carlau said:
Just sold 50 Acres of land and house which is on the 50 acres of land to a developer who wants to excise his Option that we signed years ago
Click to expand...

Sorry carlau.

When I read this, I naturally assumed that something legally binding had been signed and therefore a contract had been entered into.

My mistake.
 
Coastymike raises some good points.

It really depends on how the contract treats the sale. If the contract basically sold the property entirely and treated the payments to you as a finance / loan contract (ie you are lending him the proceeds of the sale and he is paying you back), then it would probably be treated as a full sale in year 1 (wouldn't that stink).

If the contract treated it as a gradual release of land, then you would be declaring the income over a period of time.

As for working out the cost base or cost of the property, you would have to work out the portion of the expenses that related to the land outside the CGT free main residence area.

Did you assign a value to the 2 hectares and house in the sale contract?

I would strongly recommend you see a good accountant on this one. Obviously you haven't had good experiences with the ones you visited so you may need to look at a bigger more experienced firm for this one.
 
Mry said:
Coastymike raises some good points.

It really depends on how the contract treats the sale. If the contract basically sold the property entirely and treated the payments to you as a finance / loan contract (ie you are lending him the proceeds of the sale and he is paying you back), then it would probably be treated as a full sale in year 1 (wouldn't that stink).

If the contract treated it as a gradual release of land, then you would be declaring the income over a period of time.

As for working out the cost base or cost of the property, you would have to work out the portion of the expenses that related to the land outside the CGT free main residence area.

Did you assign a value to the 2 hectares and house in the sale contract?

I would strongly recommend you see a good accountant on this one. Obviously you haven't had good experiences with the ones you visited so you may need to look at a bigger more experienced firm for this one.
Click to expand...

Hi Mry,

I'm seeing another Accounting Firm who I spoke with today and he gave me a brief run down on what to expect and the Accounting Firm is much larger and deals with these larger transactions daily.

The land will be released to the purchaser on Final payment from the date the contract is signed and released to purchaser on final payment from entering contract (3 year 36months) "No land will be released to the developer during the contract period".

I've been told that I will need to obtain a Market Value of the dwelling and the surrounding 2 Hectares that I choose that will be exempt from any CGT which I need to obtain before the date the contract is signed.

Also was told because the dwelling and 2 Hectares "and working on a rough market value" that we can offset the CGT until the 2nd Payment (18mths) 30% so that was good news to hear.

Thank you so much for all you input, this is one of the largest transactions I've made to date and even though I've been selling and building houses its alot different and I thought that my accountant of 15 years could handle it which wasn't the case.

Keep the feedback coming as the more I know before I see the New accountant the better it will be, they say knowledge is power :)
 
Hi

Amongst other things you may also like to ask your new accountant about claiming a proportion of the holding costs on the property as part of the cost base. That is, interest, council rates, insurance slashing etc.

These costs are included only where they have not been claimed as a tax deduction already.

Other than that, I agree with MRY's excellent (as usual) thoughts abt getting a valuation done on the PPOR and surrounding 2 Acres.

Good luck and please keep us novices posted with how you go.

Dale
 
Thanks for posting Carlau.
This sort of thing obviously doesnt come up every day for the vast majority of accountants, so I am not to suprised you are struggling with definite answers. As you are doing, your best option is to find an accountant who deals in these things regularly, as there may be case law available that is unknown by most people.
I am unsure if you have gone through ATO/ID 2002/691. It obviously doesnt fit your circumstances exactly but may give an idea as to roughly how it should be treated.
That ATOID quotes another ATOID:
" '3. If your selected area of land can be separately valued, you calculate your capital gain or capital loss on the remainder of your land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of the valuation. This is relevant if the value of the remainder of the land is of a greater or lesser value than your selected area of land."

This would seem to indicate as others have said, a valuation of those 2 hectares with the main residence on it would be the best starting point.
I would assume that you simply deduct that valuation from the total contract, and the balance is the gain attributable to you. I would think you could apportion all holding costs (interest, rates, etc) on the percentage worked out from the valuation as part of the cost base, as well as apply the CGT discount as you have held it for greater than 12 months.
As for when the tax on the gain would be payable, my understanding is that the CGT date is the date at which the option holder decides to exercise their option, regardless of payment. I am sure you could contact the ATO with the specifics and organise to pay the tax payable in instalments over the 3 years or something similar.
This is something I have never dealt with before, so would be very interested to know what your new accountant has to say about the issue, please keep us informed! Thanks a lot for posting.
 
I just noticed that the ATO have updated there CGT which you can download here http://www.ato.gov.au/individuals/content.asp?doc=/content/66269.htm

And if you go to page 62 of the PDF File you will see a write up now on people taking up options/covenant that they are CGT event D2 happens if you grant an option to a personor an entity, or renew or extend an option that you had granted.

The amount of your capital gain or capital loss from CGT event D2 is the difference between what you receive for granting the right and any expenditure you incurred on it. The CGT discount does not apply to CGT event D2.

The part at the end which states on Page 62 of the PDF File on CGT The CGT discount does not apply to CGT event D2. Does this mean that I might not be able to apply to have my house and 2 hectares exempt from CGT ?

I'm looking forward to seeing the new Accountant, and will let you know what happens as the ATO have been making a few changes to there CGT.
 
Carlau: there is a difference between CGT discount, and main residence exemption. I am pretty sure you will have no dramas with the main residence exemption.
I am pretty sure with regards to CGT event D2 that relates only to the option (I assume you got money from the developer who purchased an option on your land, and you paid tax on this?). D2 relates to how you treat the gain on that option.

From my understanding of your circumstances, you have two CGT events, D2 discussed above, and A1 which is the actual disposal of the land.
 
coopranos said:
Carlau: there is a difference between CGT discount, and main residence exemption. I am pretty sure you will have no dramas with the main residence exemption.
I am pretty sure with regards to CGT event D2 that relates only to the option (I assume you got money from the developer who purchased an option on your land, and you paid tax on this?). D2 relates to how you treat the gain on that option.

From my understanding of your circumstances, you have two CGT events, D2 discussed above, and A1 which is the actual disposal of the land.
Click to expand...

coopranos: Your right sorry, we were paid yearly a very small amount for signing the option from the developer. Have a Appointment next week with a Property Lawyer who is going to look over the option and make sure everything is 100% and then the Accountant the following week in the city.

coopranos I'll keep you posted on what the accountant has to say and if there are anyways of reducing the CGT tax and I will do a small write up on what happened so others can also see and learn if they encounter my situation anytime as its alot different to selling a buying just small lot of land or house.
 
Also, you can choose which 2 hectares to get the CGT exemption so choose the two most valuable hectares on your property.
 
From what I've been told you choose your dwelling "House" and any surrounding dwelling like sheds that is situated on the 2 hectares that you want exempt from any CGT as long it's used for personal use.

I dont know if you can choose your dwelling and say you have a (work shed that is used to produce income) in the 2 hectares. Just another senario to think about.

Also the House must be situated on the 2 hectares, you cant choose to have your dwelling and then choose another area on the parcel of land that you want excemp from CGT.

So yes make sure to choose the most valuable 2 hectares on your property basically which the dwelling is situated on in most cases. As if you look at farm land most dwellings are close to the street and all conections so it would be more valuable.
 
carlau, IMHO, I sense you will waste a lot more time on this matter trying to suss it for yourself...it's obviously a specialist area subject to regular change.....that's time you are probably better investing in how you are going to invest the profiit.....

One thing I might try in your shoes is to phone several large property developers in your area, ones that buy broadacre like your buyer...and ask nicely who they might recommend as an experienced property accountant.

The other people you might ask for a recommendation are
- accounting recruitment firms
- lecturers at a Melbourne university with a good accounting faculty/dept.
- housing industry association or a state accounting association if there is one.

One firm's name is bound to keep coming up.
 
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