Building - Claiming GST credits, then keeping property?

F

FrankGrimes

Hi all

I'm soon to start building a duplex. While I would like to keep both, things can change. It is my understanding from my accountant that unless I claim the GST credits as I go, AND if I decide to sell I will never be able to recover this.. So I need to be registered and claim the GST

But if I do decide to keep them as a long term investment, I just need to repay the GST credits claimed? Can someone please explain what happens if I claim the GST credits and then decide to hold the investment long term.

Thanks

Grimey
 
Well Grimey, as I'm sure you like to be called by your friends,

This happened to a close family friend:

She built 3 units on a block with the intention to sell straight away. Since it is new property the sale price had to have GST in it (also since it is over $50K as most any RE would be these days). Therefore she registered for GST and claimed and received GST credits all the way through the construction process.

At final completion she found she could not sell for the price she wanted and so decided to keep for the time being and rent out to tenants. You can't charge GST on residential rent. So she had to repay the GST credits she had received.

It was just that the original purpose in building the units had changed. I suppose in this example the GST credits were useful for cash flow purposes.

Hope this helps.
Aimy
 
Aimjoy said:
It was just that the original purpose in building the units had changed. I suppose in this example the GST credits were useful for cash flow purposes.

Hope this helps.
Aimy
Click to expand...

Thanks, this pretty much sums it up for me. I might as well claim the credits just in case I need to sell for whatever reason.

It definitely helps with cashflow, as I can just put this into the offset account until its needed/due by the ATO.

I just read something that spooked me saying that if I claimed the GST I HAD to sell regardless.
 
Hi again,

Yep, Aimjoy has it aright! My understanding is that as soon as one year of tennancy passes you are obligated to repay your GST imputation credits. (Might not have the timing on that right, but you definately have to pay back the credits). I've registered for GST even though I may yet hold all three of my units when completed. The credits up-front mean the cashflow is really improved, not to mention the whole time value of money suggesting you're actually paying less for your build cost by delaying a portion of it.

Just make sure you don't spend them all and then struggle to make the repayment once the taxman comes a calling.

Cheers,
Michael.
 
MichaelWhyte said:
Hi again,



Just make sure you don't spend them all and then struggle to make the repayment once the taxman comes a calling.

Cheers,
Michael.
Click to expand...

Haha yeah. Na it will go onto the loan to reduce the interest bill, then will withdraw as needed.

Any idea if it can be offset against a personal tax loss for that year, say I worked overseas for 1 year, incurring a massive tax loss from negative gearing and depreciation..
 
Michael

If you do rent the new IP nut decide to sell say 2 years later would that still attract GST? Is there some sort of cut off in terms of years?

Cheers

Oscar
 
one thing to bear in mind... by claiming the credits you have basically held up your hand and said "i am doing this as an enterprise, profit is my motivation and it is revenue in nature" so even if you sell in 3, 5, 7 years whatever, my understanding is that (a) you will still need to remit the GST that would have been payable and (b) it is not eligible for CGT reductions as it is revenue by nature not capital.

your intention up front is crucial. I know it sucks because I often go into somehting thinking 'well if i cant sell it for x i will keep it' but the ATO doesnt view it that way.
 
Ausprop said:
one thing to bear in mind... by claiming the credits you have basically held up your hand and said "i am doing this as an enterprise, profit is my motivation and it is revenue in nature" so even if you sell in 3, 5, 7 years whatever, my understanding is that (a) you will still need to remit the GST that would have been payable and (b) it is not eligible for CGT reductions as it is revenue by nature not capital.

your intention up front is crucial. I know it sucks because I often go into somehting thinking 'well if i cant sell it for x i will keep it' but the ATO doesnt view it that way.
Click to expand...
&&&&&&&&&&&&&&&&&&&&&&&&&&&&
Hi Ausprop,

1. The understanding that I received from my own tax accountant is that once we have claimed the GST tax credits as a property developer, we are legally obliged to sell off the newly completed houses within a 5 years time frame as permitted by the ATO, and not later than that.

2. I believe that we are also required to treat the houses under construction as a sort of a "trading stock" at cost basis, whereby we are not allowed to claim its depreciation costs or/and to enjoy the 50% CGT discount even though we may have held onto the same property for more than a 12 months holding period.

3. Is this the correct understanding/treatment that the duly-qualified members who are practising tax accountants, can further confirm/disconfirm for us in this forum, please?

4. Looking forward to be further educated in this forum, please.

5. Thank you.

regards,
Kenneth KOH
 
MichaelWhyte said:
Hi again,

Yep, Aimjoy has it aright! My understanding is that as soon as one year of tennancy passes you are obligated to repay your GST imputation credits. (Might not have the timing on that right, but you definately have to pay back the credits). I've registered for GST even though I may yet hold all three of my units when completed. The credits up-front mean the cashflow is really improved, not to mention the whole time value of money suggesting you're actually paying less for your build cost by delaying a portion of it.

Just make sure you don't spend them all and then struggle to make the repayment once the taxman comes a calling.

Cheers,
Michael.
Click to expand...
*********************
Hi Michael,

1. My understanding is that when you refund ATO the GST tax credit climed previously, you will also need to pay the interest costs at 10%p.a? retrospectively from the day when you first made the GST credit claims from ATO.

2. While claiming the GST certainly improves the cashflow while the house is still under construction, however, ultimately, the total GST payable by the property developer to ATO, will always far exceed the total GST tax credits claimed under the GST Scheme, isn't it?

3. Looking forward to your further comments/discussion, please.

4. Thank you.

regards,
Kenneth KOH
 
Kennethkohsg said:
*********************
Hi Michael,

1. My understanding is that when you refund ATO the GST tax credit climed previously, you will also need to pay the interest costs at 10%p.a? retrospectively from the day when you first made the GST credit claims from ATO.
Click to expand...



Yikes now thats just damn nasty
 
oc1 said:
Michael

If you do rent the new IP nut decide to sell say 2 years later would that still attract GST? Is there some sort of cut off in terms of years?

Cheers

Oscar
Click to expand...

Oscar > 5 years apparently.. But I'm not an accountant!


The whole GST and new housing seems like a grey area, no one can seem to give me a definite answer. Perhaps Dale (or one of the other accountants on the forum) can assist. While I trust my accountant sometimes I like to get a second opinion as it can be open to Interpretation.

Kenneth - It was actually a question asked in the latest API. Answered by DaleGG from the forum.

From my accountant (but didn't seem 100% sure)

1. I can claim the GST credits on construction etc. If I decide to sell then I pay GST based on sale price minus land etc

2. If I hold as an investment, I need to pay the credits back. He did not mention a timeframe for this. He did not mention interest as Kenneth has suggested (could this be different because you a foreign national? Please correct me if I'm wrong)

3. If I don't claim the GST credits and sell within 5 years I will still be liable for GST AND I cannot claim the credits EVER.

My issue is that I may well do either, its still too early, yet I need to claim the GST credits when I start building.. But it depends on the market, both rental and sales market.. Heck, I could keep one and sell the other

I would love someone to give me a concrete answer on this.
 
I think you have pretty much got it. my undrstanding of the 5 year rule is... if you are a developer and build a new house with the intention of holding and sel it after 5 year then it is GST free, however if your intention was always to sell it then it doesnt matter how long it takes to sell you will pay the gST. heaps of worked examples on the ATO website but to be honest its all too hard... easier to build and hold and save all the arguments
 
I've recently had very lengthy and exhaustive discussions with the ATO about this very topic. This is the deal:

1) you build a residential property

2) if you claim GST credits throughout construction

3) if you sell, you build your gst into the price and remit back to the govt

4) if you keep and you have been claiming the gst, then 12 months after the date a tenant moves in and commences paying rent you must calculate how much gst you claimed on that particular property and pay it back to the govt

5) if you leave the property vacant then the point above does not happen

6) property is considered new for 5 years, so a sale during that 5 years will incur a gst obligation to the govt

7) if you don't do point 4 above and you get found out the interest is 12% backdated, plus you'll get slogged for penalties as well

the other option of course is to not claim the gst, but then you have a cash hole

hope this helps
 
JoannaK said:
ONLY if you don't remit back after 12 months from the date the tenant moves in. it is very tricky and messy.
Click to expand...

No worries - I will just park the money in offset and pay back when its due. However, you would be crazy not to claim them really? considering the amount of extra cash flow it can give you during that time...

Thanks again
 
OK I've tried very hard to follow this thread, but I am confused.

We will keep our two builds being developed through a trust structure. As there is no intention to sell at this stage (although what if???), what do you suggest I do re GST. Claim the credits? Or not? :confused:
 
Claim the credits now and within 12 months of tenanting (as per JoannaK's response) the properties, pay back that amount to the ATO.

See it as an interest free loan equivalent to the amount of the GST payable within 12 months of tenanting the properties :)
 
Tizzy said:
OK I've tried very hard to follow this thread, but I am confused.

We will keep our two builds being developed through a trust structure. As there is no intention to sell at this stage (although what if???), what do you suggest I do re GST. Claim the credits? Or not? :confused:
Click to expand...

Tiz

As Buzz has said - claim the GST even if you are going to hold, it basically gives you extra cashflow during the building and through the first year of tenancy. My build costs are cheap at around 260k, meaning I claim around 24k in GST on the building alone (But there is more to claim than just building costs)

in one year of interest @ 7.37% (my rate)

24k/100*7.37 = $1768

While this is nothing to ride home about its still better than nothing!

Just don't spent it all as MW has said!
 
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