What does section CB11 mean for you?
It is quite common for more experienced property investors to try their hands at either property development or trading at some point. If successful, it is also not uncommon for investors to continue wearing the two hats and have both an investment portfolio and also carry on a business of developing, trading or erecting buildings for profit.
Earlier this year the Commissioner responded to a question regarding the application of section CB 11.
CB 11 applies to a person who is in the business of erecting buildings, or a person who is associated to a person who is in the business of erecting buildings.
The question raised was, “could the fit out of an existing building be “improvements” for the purpose of CB11?” If applicable, then the outcome for the taxpayer is that the net proceeds from sale of the building within 10 years may be subject to income tax.
The short answer to this question is yes, but, once again the tax payer is required to apply the law correctly. Just like the rules determining the deductibility of repairs and maintenance, there is a lot to consider before taking a tax position in your tax return.
For CB 11 to apply, the fit out undertaken would need to meet the definition of “improvements” contained within section YA1.
For the purpose of CB 11, improvements are defined as an improvement made to land that is not minor, and made by a person in the business of erecting buildings. Or by a person who is associated to a person in the business of erecting buildings.
Taking the first two parts of the definition of improvement in turn, the first step the taxpayer needs to consider is if the fit out undertaken is in fact an “improvement to the land”. The initial thoughts of a taxpayer may be that a fit-out cost does not improve the land, but instead improves the building. However, this line of thought would be incorrect. Case law has found that an improvement to land is: ANY work done to land that enhances the value of the land. Buildings are legally considered to be attached to, or part of the land so work carried out on a building can result in an improvement to the land. Fit outs included.
In most circumstances it would be safe to assume that any parts of a fit out that are permanently attached to the building will become part of the land.
The second aspect that a taxpayer must determine is if the work is “Not Minor”. If the fit out undertaken is considered to be minor, then CB 11 will not apply. Once again there has been considerable debate as to what defines a work as “not minor”. This is a subjective process and best done with the assistance of your tax advisor.
If you are unsure or if you have a taxing issue in regards to CB11, feel free to contact Carole Pedder for a confidential chat.
