CGT and GST when selling new build

[eggnog]

Thought I might run this question by the board before I raise it up with my accountant and nut out a detailed financial feesability study. Gives me time to first get my head around the concepts, think things through and identify the proper questions to ask my accountant.

Property in question is located in Brisbane and has been an IP ever since purchased quite a few years ago. I feel that the time is getting close to demolishing the original house and build 2 houses on the splitter block. What are the tax implications if I decide to immediately sell one of the houses I build either as off the plan or straight after completing the build. Do I have to pay for GST? How is GST calculated? For CGT will a 50% exemption be applied on the profit above base + build costs. I am assuming the base cost will be half of the original purchase price adjusted for claimed depreciation and capital works.

 

[coastymike]

What was your original intention when you purchased it years ago ?

 

[eggnog]

Original intention when I purchased the property 5 years ago was to wait for median suburban rents to grow to a point where it can service the repayments on knocking down the original house and building 2 in its place. But with changes to council zonings am presented with the opportunity to split another property of mine. This got me thinking if it is better to sell a new build and use profits to subdivide and build the other property which is located in a much nicer suburb and will also have a much higher end value.

 

[coastymike]

Intention will be important. If the original intention was to buy and hold and an opportunity I.e. change in council zoning means you can subdivide then this tends to suggest a sale on capital account and therefore cgt applies. If original intention was to subdivide and build and sell then tends to suggest revenue account and no capital gains I.e. no cgt discount. This might help determine which property has a better after tax result and help in the decision making.

The next step in determing whether gst applies is to determine whether the sales of the properties were done in the course or furtherance of an enterprise.

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done

- in the form of a business, or
- in the form of an adventure or concern in the nature of trade.

An entity may undertake more than one enterprise. Thus, an entity may be carrying on a business, and be conducting another unrelated enterprise.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for GST purposes.

The phrase 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the acquisition, construction and sale of real property.

The term 'business' ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

For isolated transactions and sales of real property, the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

 

[eggnog]

Thanks for the replies. Could you explain how gst is calculated and is this amount what you have to pay to the ato.
also, original intentions is all airy fairy stuff. How does one justify to the ato your intentions and therefore which tax pathways are applicable
You mentioned if intentions were to originally hold then cgt discounts apply but if originally intending to build then sell then no cgt discount. Therefore wouldn't it be better to always say your original intention was to hold

 

[coastymike]

GST will depend on whether you choose to apply the msrgin scheme or not. For residential property most people would chose to apply the margin scheme.

Intentions are usually traced to actions. E.g. did you put in a DA years ago, engage an architect, etc. The ATO would look at those actions as being indicative of your intention. Have you done past developments, etc. All things they would look at.