My understanding is that if you claimed GST on the construction costs of the 3 units you keep and then rent the units out, you have to pay back the GST you claimed. I was referring the to keeping side of the equation, not the selling side.
Do full-time developers hold stock?
- Thread starter MTR
- Start date
That assumes you paid GST on the $500k sale. You'd likely NOT pay any GST if you bought it from a normal residential land owner. GST might be payable if the land was commercial, or possibly if the land was purchased from a developer who themselves have to pay GST on the sale.
You cannot just claim 1/11 of the purchase price as GST. You'll need a Tax Invoice from the previous owner.
My accountant indicated that you get a rebate (or whatever the term is) from the ATO for the gst component of the resi property that has been subdivived.
I may have misunderstood him...
Of course... otherwise you are double dipping.
But someone who builds to rent (so doesn't claim GST), rents for a little while and then decides to sell could get in trouble doing this.
"If you build a residential property and rent it out, you cannot claim input tax credits on the cost of the construction. This is because residential rent is input taxed, ie GST is not payable on the rent received but no input tax credits are allowed for the costs of building the rental property."
If you then rent out for a short time and then sell, you are up for the full GST on the sale of the properties. I know someone who did this on four townhouses. He is still paying back the initial loan 5 years later.
I need to discuss the 'bold' section "partitioning to separate completed titles with my accountant", everything else makes sense and is in place. My accountant is also a developer so I assume he has it right, will check and get back with the response.
There is no question that I must pay GST, I will have 3 on the go this year, profits I think?? over $75,000 pa ATO classified as investor/developer. I do not want to mess with ATO as I am told they come down hard and will back date from deve 1 and penalties will apply.
Spoke to my accountant and am happy with my structure, I think its the best option for me.
My situation may differ from you and what you are trying to achieve, best to seek professional help for your own situation.
Also, we discussed GST, for your information, you do not pay GST if you hold the property for 5 years.
Cheers
MTR
My situation may differ from you and what you are trying to achieve, best to seek professional help for your own situation.
Also, we discussed GST, for your information, you do not pay GST if you hold the property for 5 years.
Cheers
MTR
Do you mean a scenario like this?
5 Townhouse Development on a 2000m2 Block of Land
- "XYZ Developments Pty Ltd ATF The Mr XYZ Property Trust" purchases the 2000m2 block of land.
- "XYZ Developments Pty Ltd ATF The Mr XYZ Property Trust" contracts with "XYZ Constructions Pty Ltd" to develop the 5 Townhouses.
- On completion of the build and with titles in hand, "XYZ Developments Pty Ltd ATF The Mr XYZ Property Trust" sells 4 of the units and incurs CGT and GST.
- The last of the 5 units is transferred to "XYZ Holdings Pty Ltd ATF The Mr XYZ Family Trust". (What would be the GST, GST and Stamp Duty consequences in this transfer and how would one achieve it?).
Does that look correct or would the retained Townhouse/Unit be left in "XYZ Developments Pty Ltd ATF The Mr XYZ Property Trust". I can see asset protection being an issue.
Spoke to my accountant and am happy with my structure, I think its the best option for me.
My situation may differ from you and what you are trying to achieve, best to seek professional help for your own situation.
Also, we discussed GST, for your information, you do not pay GST if you hold the property for 5 years.
Cheers
MTR
Good to hear. I assume you're using different entities for each development?
Anyway, we discussed my projects etc. and he mentioned that when you start off as a developer it is a good idea to sell most of your properties to increase cash flow which in turn enables one to get into bigger projects. I know not rocket science, however when starting it is so difficult to know which way to go.
I have to break the mentality/habit of collecting, sometimes you need to sell to move forward.
I personally have had to sell the first few of my developments simply to increase my cash at bank.
My philosophy revolves around 20% cash up front, not equity. Short term pain with minimal risk, as I want my long term goal to be paid off IP's. I don't see the "realistic, money in the bank, security" in negative gearing that positive gearing gives me.
I have grown up seeing the Greeks and Italians working hard, paying cash for everything, selling up to realise their profit and moving onto the next project until the first is debt free and there is enough cash to fund the second. My take is that method has worked since the birth of our great nation and that these new philosophies are just that, new and untested.
The ATO/Govt can change the rules and shift the goalposts at the drop of a hat. But they cant (in theory) take away paid off properties or cash in the bank. But they can increase GST, remove tax benefits on IP's (in the sense of claiming the interest component), etc, etc...
Maybe im wrong, maybe im right??? But I reckon the sun that shone yesterday is the same sun that shines today...
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Is the primary objective of this for asset protection? I.e. if the were any problems with the constructed properties and the new owners went after the entity that sold them, then that exposure is quarantined from the other assets.
My accountant mentioned something similar a while back. It sounded too complex and thought he was just trying to drum up more work.
Hi Sanj
This is what I will be doing below. I will not have a separate entity for each purchase, I don't believe this is necessary, if it is for asset protection I think its an overkill and costly exercise not to mention the paper war I really don't need.
The Trust purchasing the land for development
I have set up a company, the company will perform the project management and property management functions of business and rentals
The newly setup project management company will contract its services to the land holding trust..the company will register for GST
The land holding trust will develop the site, pay builders costs and pay the project management company during the development. The Trust will register for GST and may have CGT and GST to pay on the sale of the properties.
Once all the properties are built, some may be sold , some may be retained BY THE TRUST, .the ones retained will stay in the trust until sold or perhaps transferred to another entity, to protect your assets further.We will be meeting to discuss the benefits etc of transferring property to SMSF.
I failed miserably in accounting so I am solely dependent on the experts that I employ to get it right.
The other benefit to setting up my own company is that I will be able use this/the figures when securing finance.
Its all a learning curve at the moment, one step forward, two steps backwards
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Hi Longrass
Wow, I posted this thread last year in April 2013, a while back now
I don't believe there is a right or wrong, just what you have to do to get ahead and its your own personal situation, they don't make a manual on it
.If it means you need to sell properties to move forward this is what you do.
My accountant's clients in the main are investors/developers, many sell everything and invest profits in shares, different strokes for different folks.
Ultimately, one would want to have a very strong cash position while creating income streams by holding some stock which will of course be cash flow positive.
My initial plan was to have 2 projects on the go per year, I realise that I can do 3 today and expect that this will increase. However, I have sold properties when the market was rising and also purchased development sites.
MTR
Hi Sanj
This is what I will be doing below. I will not have a separate entity for each purchase, I don't believe this is necessary, if it is for asset protection I think its an overkill and costly exercise not to mention the paper war I really don't need.
The Trust purchasing the land for development
I have set up a company, the company will perform the project management and property management functions of business and rentals
The newly setup project management company will contract its services to the land holding trust..the company will register for GST
The land holding trust will develop the site, pay builders costs and pay the project management company during the development. The Trust will register for GST and may have CGT and GST to pay on the sale of the properties.
Once all the properties are built, some may be sold , some may be retained BY THE TRUST, .the ones retained will stay in the trust until sold or perhaps transferred to another entity, to protect your assets further.
We will be meeting to discuss the benefits etc of transferring property to SMSF.
I failed miserably in accounting so I am solely dependent on the experts that I employ to get it right.
The other benefit to setting up my own company is that I will be able use this/the figures when securing finance.
Its all a learning curve at the moment, one step forward, two steps backwards
Thanks Maria. I guess my issue with this is that you're exposing a fair bit and mixing your buy and hold assets with your development stock which seems unnecessary. I do agree that we need to trust the advice of our experts though
I suppose you're only doing 2 or 3 units each and have a much more valuable portfolio you wouldn't walk away from anyway so I can sort of see why he is taking that approach
Thanks Maria. I guess my issue with this is that you're exposing a fair bit and mixing your buy and hold assets with your development stock which seems unnecessary. I do agree that we need to trust the advice of our experts though
I suppose you're only doing 2 or 3 units each and have a much more valuable portfolio you wouldn't walk away from anyway so I can sort of see why he is taking that approach
Accountant and I discussed this and I don't believe I am overexposed. I also think there are professionals who scare monger not referring to anyone on SS and just my opinion. I know I completely went overboard with asset protection for my US properties, its cost me dearly in accounting fees and is just an overkill, I realise this now after the event.
Also, having a bank mortgage over your property in part protects your asset, if the bank owns 80% .. food for thought, I know someone will shoot me down.
