No – the costs will be included in the cost base of the land for CGT purposes.  If you build on it and rent out the property, the costs remain non-deductible.  You effectively get a "deduction" when the land is eventually sold.

However, depending on the size of the block, you may be able to incorporate the land into your main residence, which would mean its future sale will be tax-free (still no tax deduction for the legals and title search though).  Land up to 2 hectares (including your house) can be treated as your tax-free main residence.

Eddie
[email protected]

Hi Thomas

Email me. In any case, I think hybrid trusts are probably not worth the effort relative to the risks and complexities inherent in them.

Eddie
[email protected]

What is the approximate dollar value of the property?

Eddie
[email protected]

I agree.  Under a bare trust, you retain beneficial interest in the property and I doubt FIRB would permit that.  On the other hand, if you are using a discretionary trust under which there is generally no presently entitled beneficiary at any one time (unless the trustee makes a distribution of corpus), it's an entirely different proposition from the bare trust scenario.

Eddie
[email protected]

I agree.  You will be taken as if you have on-lent your half of the loan proceeds to your wife to enable her to buy the property.  In your tax return, you need to show an interest income and interest deduction of the same amount (being the interest charged by the bank on your half of the loan).  Your wife will then claim the interest on the entire joint loan.

Eddie
[email protected]

Hi all

Happy Australia Day – well, for yesterday anyway.

Yes, I agree this is confusing – keeping up with the thread has been exhausting enough!

A couple of points as I go through the comments:

Buy through trust

1. Similar to Terry, I don't think having a related trust buy a property and then having you three buying off the trust will necessarily disqualify you from the grant.  Under the disqualifying arrangement provisions, the relevant rule to look out for is whether you entered into the arrangement with the sole or main purpose of getting the grant, rather than buying a home.  Given the nature of the land – the trust is akin to an intermediary, which enables the land to be subdivided, thereby allowing you three to purchase separate homes. 

2. Normally, setting up a two tier arrangement like your suggestion would entail double duty but given the first home concession duty rates, I don't think the secondary sale of the separate titles to the three of you will entail duty, provided that the market value of each property on sale is less than $550K.  In other words, there will only be one lot of duty, being the duty payable when the trust buys the land.

3. Terry's rough estimate of the GST is close.  However, the GST could be a tad lower if the trust can buy the land under the "margin scheme".  To qualify, the trust needs to have bought the land from a vendor who either isn't registered or required to be registered for GST or who is selling the land under the margin scheme.  The GST in that scenario may be:

GST on sale: $1.2M – $400K (cost of land) / 11 = $73K.
GST claimable on development costs: ($100K + $300K) / 11 = $36K
Net GST payable = $73K – $36K = $37K. 

Not exactly earth shattering compared with Terry's figure of $40K.

4. I suspect the trust will not qualify for the 50% CGT discount because it is likely that it will be taken to be carrying on a one-off profitmaking undertaking, regardless of the period of ownership of the property by the trust.  Therefore, the CGT payable will be more like $60K each.  Ouch.

5. I sympathise with your comment that the government is seeing the trust and yourselves as different people, even though in reality, all you are all trying to do is to buy a home.  However, you need the same rationale to qualify for the grant.  In other words, it is difficult to "have your cake and eat it too".

6. In summary, this is not a good result – you pay GST and income tax of $37K + (3 x $60K) = $217K to qualify for the grant of $14K x 3 = $42K.

Buy as individuals

7. If you buy the land together as tenants in common with a view of building a home on it, you will qualify for $21K in aggregate.  There will not be any GST issue.

8. However, there may potentially be CGT issues when you split the title between the three of you.  That is because, for CGT purpose, each of you may be taken as if you have disposed of two thirds of your one third interest in the land and acquired a third interest from the third interest held by each of the other two parties each (I know – very confusing!).  The CGT liability will depend on the value of the property, relative to its cost base, at the time of the separation of interest.

Potential Solution

9. Given the above issues, in my view, I would try to negotiate with the vendor (eg, pay them more) to encourage them to subdivide the land into three separate titles before your purchase.  That way, each of you may be entitled to $21K without any GST or CGT issues.

10. If you head down this path, you need a good lawyer to draw up the special conditions in the contract, eg, you may need to incorporate an option, which will be exercised upon the subdivision of the land, etc. 

Disclaimer time – as usual, the above doesn't constitute formal advice, blah, blah, blah …. Really encourage you to see an accountant to firm up the advice.  Good luck!

Eddie

[email protected]

Speaking like an accountant.  Well said, Terry.

I do generally recommend a separate loan account for each property if possible because the Rental Schedule in the tax return requires you to show the interest attributable to each specific property.

Eddie
[email protected]

Both good ideas.  However, they may not be suitable when further issues are considered:

1. With super, a fund can't easily borrow (as easy as individuals anyway and it is costly under the instalment warrant provisions) – then depending on your age, the money in the fund will be preserved until you turn 60, which may not be attractive if you are relatively young.

2. The IT company will be subject to the "personal services income" rules, which may not be easily circumvented.

Perhaps do it the traditional way – borrow against the equity in your home, buy the IP, and negative gear in your own name.  Having said that, need to consider asset protection if you are susceptible to risks.

I agree, time to see an accountant to tailor a solution for you.  I dare say you wouldn't find too much on the net – specific strategies are usually closely guarded by tax professionals for obvious reasons.

Eddie
[email protected]

Thanks for the vote of confidence, Terry! Yes, of course – more than happy to help.

Eddie
[email protected]

My pleasure as always, Terry!

Eddie
[email protected]