family trust and GST

hi.

currently own 2 IP bought under individual name and planning to subdivide block and sell rear in the future. during that time, intent was to hold long term for capital growth.

anyways, looking to purchase a dev site soon and now i know that if ATO deems that you are developer, they can apply the GST retroactively.

not much i can do with my 2 IPs for now. i have also heard that for once or twice off, they might not deem you a developer if you really intended for it to be investment at the time, but if you keep subdividing and selling then you become developer.

question is, if i purchase IP under family trust and develop properties in future, will it shield the 2 IP in my individual name? or do i need to set up company or different trust.
 
hi.

currently own 2 IP bought under individual name and planning to subdivide block and sell rear in the future. during that time, intent was to hold long term for capital growth.

anyways, looking to purchase a dev site soon and now i know that if ATO deems that you are developer, they can apply the GST retroactively.

not much i can do with my 2 IPs for now. i have also heard that for once or twice off, they might not deem you a developer if you really intended for it to be investment at the time, but if you keep subdividing and selling then you become developer.

question is, if i purchase IP under family trust and develop properties in future, will it shield the 2 IP in my individual name? or do i need to set up company or different trust.

First lets address the isolated transaction view. The ATO is adamant that they don't care if a transaction is isolated or singular. Transactions need not repeat. One is enough. GST and other tax implications may arise. For example - CGT rules DO NOT apply to a dev of land and then its sale. It is also subject to GST. Fact.

If you buy land an intend to build and then sell one and keep one the tax issues that are likely to arise include:
- One lot may be subject to CGT and one likely will not. Taxed as ordinary income as intent was to make profit (This law traces back to 1936 or earlier and is 50 years before CGT laws were made).
- One one you sell WILL be subject to GST
- Apportionment of land, subdiv costs, build costs etc inclusive or GST and the GST element will be a issue to address.
- You may be able to save on the GST issues using the margin scheme.
- You may be able to claim 50% GST on the build at some point
- Timing for deductions on the construct ? Interest etc may be deductible for one portion all way through and for other after it is complete. This will affect CGT records

Seems confusing and daunting ? Its time for personal tax advice. Planning the right amount of tax into the dev is normal. You don't want to overpay or underpay tax.
 
The issue of whether the sale of land is an isolated transaction not requiring registration for GST; or in the furtherance of an enterprise that does require registration is a common dilemma.

As Paul points out, obviously the tax office will want to try and classify every sale as a business transaction but I am not so sure that the law supports the view that EVERY isolated translation sale of land that involves you making a nice profit will be a taxable supply for GST purposes. The mere fact that you are maximising your return (by subdivision for example) is not a determining factor.

CGT has similar provisions.

Indeed there are many private binding rulings that confirm this. Your initial intent was not for short term profit motive. It may be worth further consideration on both the GST and CGT implications.
 
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Isn't it an 'it depends on the circumstances' and the repetition of said activity gives more weight to it being classed as a business?
 
The issue of whether the sale of land is an isolated transaction not requiring registration for GST; or in the furtherance of an enterprise that does require registration is a common dilemma.

As Paul points out, obviously the tax office will want to try and classify every sale as a business transaction but I am not so sure that the law supports the view that EVERY isolated translation sale of land that involves you makes a nice profit will be a taxable supply for GST purposes. The mere fact that you are maximising your return (by subdivision for example) is not a determining factor.

CGT has similar provisions.

Indeed there are many private binding rulings that confirm this. Your initial intent was not for short term profit motive. It may be worth further consideration on both the GST and CGT implications.

And to further Gary's good points even a sale intended to make no profit which is intended to reduce debt (for example) may be a trigger. Profit alone isn't a required outcome.

However thinking of a young guy and girl. Buy land intending to live there. Build a home. Intending to live there. Rent it out while they both save for wedding. Then they bust up... GST still applies. The ABN issues in MT 2006/1 are all fine.. The issue is its new residential. Taxed when first sold.
 
Isn't it an 'it depends on the circumstances' and the repetition of said activity gives more weight to it being classed as a business?

http://law.ato.gov.au/atolaw/view.htm?Docid=MXR/MT20061/NAT/ATO/00001
is MT 2006/1

Para 120 / 121 deals with enterprise...Same rules apply to GST and tax.

Para 125 addresses repetition but also considers isolation....Its not that important. Have a look at para 234-236 for even one-off. This is different from small scale - Para 180.

An enterprise doesn't need to be a business. It may be a activity (one-off even) or a series. But a business will be an enterprise. Repetition gives greater certainty. An isolated transaction may require further consideration of intent. Remember that the ABN / GST requirements looks at commencement as a key timing factor.
 
However thinking of a young guy and girl. Buy land intending to live there. Build a home. Intending to live there. Rent it out while they both save for wedding. Then they bust up... GST still applies. The ABN issues in MT 2006/1 are all fine.. The issue is its new residential. Taxed when first sold.

Interesting, I'm not so sure it's a taxable supply, because it lacks the intent to make a profit. Para 235 of MT2006/1 speaks of one-off transactions being taxable on revenue account, as the property was acquired for the purpose of profit-making by sale. Which is different to the intent in your example.

Happy to hear other thoughts or case law examples of GST on residential properties.

EDIT - agree though that certain one off transactions can be taxable for GST purposes. Repetitive sales are not necessary for making a supply for GST purposes.
 
Interesting, I'm not so sure it's a taxable supply, because it lacks the intent to make a profit. Para 235 of MT2006/1 speaks of one-off transactions being taxable on revenue account, as the property was acquired for the purpose of profit-making by sale. Which is different to the intent in your example.

Happy to hear other thoughts or case law examples of GST on residential properties.

EDIT - agree though that certain one off transactions can be taxable for GST purposes. Repetitive sales are not necessary for making a supply for GST purposes.

Correct - The example of guy and girl is not subject to GST under the conventional principles. However as the sale is new resi premises it becomes taxable. GST applies when it is first sold and doesn't care about other factors. They are obliged to register for GST. But if they sold it OTP before completion has ended and it become residential prop used for first time then no GST. The next owner would start a five year clock for GST. After 5 years of use as a residential prop they could sell it and no GST applies.

The important issue is that NEW resi is (almost) always subject to GST.
 
Correct - The example of guy and girl is not subject to GST under the conventional principles. However as the sale is new resi premises it becomes taxable. GST applies when it is first sold and doesn't care about other factors. They are obliged to register for GST. But if they sold it OTP before completion has ended and it become residential prop used for first time then no GST. The next owner would start a five year clock for GST. After 5 years of use as a residential prop they could sell it and no GST applies.

The important issue is that NEW resi is (almost) always subject to GST.

You've got me thinking (which is a good thing!). I read it a little differently. My understanding is that new residential property is subject to GST, and GST must be paid on sale only if the seller is required to be registered for GST.

GSTR2003/3 states: The sale of a person's private residential premises will not be subject to GST, even if the premises are new residential premises, unless the sale is in the course or furtherance of that person's enterprise and the person is registered or required to be registered for GST.

In other words, if there's no enterprise, there's no GST payable. Now, the question is, is the sale of a new resi property automatically an enterprise? I'd argue no, and that whether or not it is an enterprise is determined by the facts of the case.

Couple splitting up, sell property - no enterprise - no GST
Couple subdivide block to develop and sell for profit - enterprise - GST.
 
Find me an isolated transaction that isn't the persons home and convince me that profit making isn't an intention to buy, develop and then sell within 5 years after completion. I suppose the guy girl was a bit of a poor example as I was thinking of a different scenario then over simplified it....

I was going to use a real example recently put to me. Normally I avoid client issues but this one isn't SS....Two friends. They bought a large land lot to develop. Build, rent and then sell in 10 years or so. Their plan was to build three + a year and repeat it - They will sell most of them in 10-12 years. Now they want to sell one after 12 months rented...They realised they need to sell 1 in 4 to refinance and repeat the builds. I said it triggers GST. I think its an enterprise. Their contract needs to choose the margin scheme or they are liable for 1/11th later. They of course don't want any GST. My reason ?? They argue its their super.....I argue they will sell to make a profit to release that profit. Their plan requires sale to release profit to fund next builds. Their enterprise started with the land acquisition. Not the builds. Ignoring the repetition its a enterprise. I also think its a business but that's questionable - They accept they have no CGT discount. The enterprise was all that was needed.

They came to me cause their former accountant said same.

I always advise taxpayers that until proven otherwise assume that GST applies to sale of new resi. Too many people cherrypick advice and think they suddenly found a loophole and that they can ignore GST as they don't have an enterprise.
 
My understanding is that new residential property is subject to GST, and GST must be paid on sale only if the seller is required to be registered for GST.

Yep.

The 'new residential property' classification merely removes it from the exceptions for input taxed supplies.

But don't forget, if it is an enterprise (wider meaning than business) and projected turnover (future sale price) exceeds the threshold then they are required to be registered.
 
Correct - The example of guy and girl is not subject to GST under the conventional principles. However as the sale is new resi premises it becomes taxable. GST applies when it is first sold and doesn't care about other factors. They are obliged to register for GST. But if they sold it OTP before completion has ended and it become residential prop used for first time then no GST. The next owner would start a five year clock for GST. After 5 years of use as a residential prop they could sell it and no GST applies.

The important issue is that NEW resi is (almost) always subject to GST.

I would think that it would be fairly easy to avoid both GST and CGT on this example. In fact this would be the classic example of when GST would not apply to a sale of new residential premises within 5 years.

If you are not registered for GST the sale of a new residential property in less than 5 years will not force you to be registered providing of course you can prove that you did not built the property predominately to profit from its resale.

Section 185-25 excludes from the calculation of annual turnover the supply of a capital asset. Building the property for private use (or even rental) then selling, is the supply of a capital asset and not included in the annual turnover test.
 
follow up question:

if the other way around, you purchased a site intending to develop and sell. you end up renting it out for 5 years. does it mean it becomes CGT instead of GST liable?


also, if you have spent money on a site already before registering for GST, can you claim the GST paid amount back later on? OR, only can you only claim any GST paid AFTER you register. i guess this if for those that change their minds after.
 
follow up question:

if the other way around, you purchased a site intending to develop and sell. you end up renting it out for 5 years. does it mean it becomes CGT instead of GST liable?


also, if you have spent money on a site already before registering for GST, can you claim the GST paid amount back later on? OR, only can you only claim any GST paid AFTER you register. i guess this if for those that change their minds after.

Perhaps. The longer you hold it the easier it is establish that intent. Its one of the reasons why a trust can be a better structure...Documented minutes describing intent or change intent may assist and support the case. Also applying for a 5 year IO loan and advising bank that you may sell after the 5 years are up all are part of that trail.

On the GST issue that's a bit more complex...If you have an ABN and are conducting an enterprise and are reg for GST its possible that the GST paid but not claimed can be treated as an adjustment event in whole or part by the time the prop is sold. Its quite normal in devs that some are sold - Claim GST on way through. For those kept you defer the GST claim. When its certain its being sold then claim it - Or its a reducing credit on the GST from the sale. This can affect other taxes too as the cost base for depn etc will be GST inclusive if it isn't claimed etc.

Personal tax advice always a great idea. There are many strategies....
 
Find me an isolated transaction that isn't the persons home and convince me that profit making isn't an intention to buy, develop and then sell within 5 years after completion. I suppose the guy girl was a bit of a poor example as I was thinking of a different scenario then over simplified it....

I was going to use a real example recently put to me. Normally I avoid client issues but this one isn't SS....Two friends. They bought a large land lot to develop. Build, rent and then sell in 10 years or so. Their plan was to build three + a year and repeat it - They will sell most of them in 10-12 years. Now they want to sell one after 12 months rented...They realised they need to sell 1 in 4 to refinance and repeat the builds. I said it triggers GST. I think its an enterprise. Their contract needs to choose the margin scheme or they are liable for 1/11th later. They of course don't want any GST. My reason ?? They argue its their super.....I argue they will sell to make a profit to release that profit. Their plan requires sale to release profit to fund next builds. Their enterprise started with the land acquisition. Not the builds. Ignoring the repetition its a enterprise. I also think its a business but that's questionable - They accept they have no CGT discount. The enterprise was all that was needed.

A bit late back to this, I realise...

I'd agree this would attract GST on the one sold inside the five years. It's clearly an enterprise, and not a one off. This is a much different example to the other example you have used.

A separate - but connected - matter. I'm assuming they have not claimed any GST on the building of these units?
 
follow up question:

if the other way around, you purchased a site intending to develop and sell. you end up renting it out for 5 years. does it mean it becomes CGT instead of GST liable?

.

In most cases, yes, this would become a capital asset. One the new resi is over 5 years old, it is no longer new resi and no GST is payable on sale.

The issue here is that the GST claimed on the building would need to be paid back, using the ATO's ridiculously complicated apportionment method.
 
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