GST Applicable to the "Enterprise" of Renovating & Selling 2nd Hand IPs?

[MF35]

Hi All,

I'm trying to work out what an "Enterprise" for the purpose of GST actually is and if it affects people buying, renovating and selling second hand IPs?

I found this definition for an "Enterprise" in "Goods and Services Tax Determination GSTD 2006/6" on the ATO website;

"An enterprise is defined as an activity or series of activities done in a certain manner or by certain entities. The activities covered include those done in the form of a business or an adventure or concern in the nature of trade, leasing on a regular or continuous basis, activities done by charitable or religious institutions, superannuation funds, and activities done by the Commonwealth, a State, a Territory, or local government."

There may be more on what exactly constitutes an enterprise for the purpose of GST but I haven't seen it yet.

Now I think I've got my head around the basics of GST being applicable to New Property (including Substantially Renovated Property), for the first sale, unless it's leased for 5 years. What I'm trying to work out is, if as an individual who works in an occupation completely separate from Real Estate or Building related trades I buy, renovate and sell residential IP's as part of an overall investment strategy can the ATO deem me to be carrying out an "enterprise" and therefore the sales be subject to GST? The IP would not be "New" and it would be residential.

There are two circumstances that I'm concerned with are;
1) When the second hand property is purchased with the intention of on selling (after renovation or otherwise) in a relatively short period of time (at most 12 months to get the CGT reduction but possibly less), or
2) When the second hand property is purchased with the intention of holding it medium to long term, but a review of the portfolio / change of personal circumstances etc results in a decision to sell it.

If an individual not carrying on a business does either of these with Second Hand property could GST apply? Any Renovators and Accountants or others who can help out with this one?

Thanks,

MF35

 

[MF35]

Ok no takers so far. Well I've done some more reading and I'll provide some more detail on how I think GST could affect the sale of properties that are "Not New" for the purposes of GST where the owner is an individual (not a business) and is not registered or required to be registered for GST. It's concerned primarily with the purchase and renovation of IPs and the potential impact on resale of the same. This is just my understanding of what I've read so those with greater knowledge / experience should feel free to jump in.

The main considerations appear to be;

1) Your Intention at the time of purchase;

If you buy for the primary purpose of resale for a profit (regardless of whether the IP was purchased as part of an actual business or not) you would likely be deemed to be "trading" and engaging in an enterprise / venture that WOULD BE SUBJECT OF GST. In which case your profits would be taxed as "income" (as opposed to the realisation of an asset) and be taxed at the top of your taxable income at the appropriate tax bracket. CGT discounts re holding for 12 months etc don't apply to IPs purchased.

2) If when you buy the primary purpose is not resale for profit, but at a later time your intention changes to resale for profit;

If you're primary purpose for the purchase was not resale but you undertake major improvements (including subdivision, builiding new dwellings etc) just prior to sale, you could be deemed to have converted the sale to an 'enterprise' for the purpose of GST in which case GST would be payable on the sale. However, in this circumstance you may still be able to claim the CGT discount from the date of purchase up until the you undertook the work deemed to have changed your sale to an "enterprise".

This appears mainly relevant to situations where property is held for a number of years as a rental before being subdivided & having 'substantial renovations' done or new premises built, or simply having new premises built, prior to sale. Seems unlikely to be relevant to an IP renovated but not made "new" before sale which would likely be deemed simply to be the realisation of an asset.

3) Buying when your primary purpose is Not Resale for profit;

If when you buy the primary purpose is not resale for profit & you later sell you'll generally just be deemed to be realising an asset. In which case you'd pay no GST and would pay tax on the Capital Gain with any CGT discount applicable (as opposed to it being treated as income).

If you buy and then sell in a relatively short period of time you'd want to be able to provide a reasonable reason why you are selling when you're intention was originally to hold as a rental (not resale for profit). Eg - change in personal circumstances that requires the sale, better investment opportunity elsewhere etc. If you were repeatedly buying 'not with the primary purpose of resale' but selling shortly after for other reasons, especially if these sequence of purchases/sales were in a relatively short period of time you'd likely eventually run out of credible reasons for your change of mind and come under scrutiny by the ATO. After which any further sales would more likely be deemed to be "trading" and an "enterprise" subject of GST.

If you were buying and selling for profit you'd want to be doing so on the basis that you were going to pay GST and have ascertained that this would be sufficiently profitable even if GST was applicable and the profit was treated as income. In which case there would be no CGT discount applicable and the only benefit of holding the property for any length of time would be an expected increase in value based on a rising market or value added through renovation or development.

Does this sound about right?

Does anyone buy, renovate and sell in circumstances where they ARE SUBJECT OF GST? Does the GST payable (GST paid on sale minus any GST claimable) have a major affect on the profitability of such projects? Are they still worth doing if GST is payable?

Thanks, MF35.