GST & CGT Implications

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From: Anonymous


Hello

My husband is a builder & we run a small construction business. All our work to date has been residential and commercial work for clients. We have several IP which we have bought & intend to hold.

We would like to start to buy, renovate & sell residential properties for an income to supplement/replace our work for clients.

We have had an offer accepted today on a residence which would be ideal for this purpose.

My question is the GST & CGT implications of this. I rang the ATO 3 times today with and received conflicting advice. I rang our accountant, who rang the ATO and his advice differed again. My queries are:

- If we plan to renovate & sell, can we claim back the input tax credits on services and materials used in the renovation?

- If we decided to keep the property after renovation for an IP or if the property failed to sell at a suitable price and we rented it out for a period, how would this effect the GST?

- Are there GST implications on the purchase and sale of the property?

- Is there CGT on the net gain of the project, or is the profit included in our usual Profit & Loss accounts and income?

- We operate as a partnership. (I know this is not the best entity, but the set up costs, unwanted workers comp premiums and super for ourselves have deterred us, for a while any way).

Thanking you

Jane
 
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Reply: 1
From: Kristine .


Hi Jane

I posted this in reply to 'joan' a few days ago. Not all of this will apply to you as you are already registered as builders. However, I have cut & pasted it intact.

After two years, there is now enough case law to establish precedent in application of the GST. The Field Officers I spoke to have been most helpful and have continued to send me photocopies of various examples. Their strong suggestion was a Private Ruling on every purchase. Once given, the ATO guarantees that you can rely on the Ruling for that specific application.

Remember, it's all self assessment!!

Good luck


****************

Dear Joan

Contact the Building Practioners Board.

There is a White Paper under discussion regarding Owner Builders, with industry recommendations to revert to the former 'one per five years' rule, and more than that will require a domestic builders licence.

Holmesglen TAFE run 17 hour Owner Builders courses - excellent value at around $350.

Also look up www.buildsafe.com.au and www.ownerbuild.com.au

If you are an Owner Builder you are responsible for the work. All work, apart from that actually done by you, must be done by a Registered Building Practitioner eg registered plumber, cabinet maker, etc who signs a contract with you detailing the work to be done and gives you a copy of their indemnity insurance.

Prior to selling the property, you must get a defects report, plus must have indemnity insurance for the next 6.5 years for all the work you have done. Your legal responsibility runs for 10 years.

Tax wise, the amount of work you do on each property will affect whether you must collect GST on the retail of the property. If there isn't 'substantial' work done (and this includes intangible work such as subdivision, change of land use etc), the supply of the property may not be taxable, in which case you keep records and do a standard Trading and Profit and Loss Statement for each transaction, transferring the profit or loss to your regular income tax assessment for the year the property is sold.

If there will be 'substantial' improvement (keep in mind, the ATO requires self-assessment of what constitutes substantial), then the supply (retail) becomes taxable for GST purposes. As you will be turning over at least $50,000 taxable supply per year, you will need to be registered for GST, have a clause in the sale contract to that effect, and have the choice of claiming back the GST you have paid on acquisitions (purchases) either monthly or quarterly. This is refunded to you in cash by the ATO. At the end of the day, GST will be 1/eleventh of the margin between sale price (supply) and purchase price (acquisition) of the property (should you choose to apply the margin scheme to the transaction). The usual Trading & Profit & Loss process then applies, with the profit or loss being accounted for in your usual income tax return.

My information is that you must hold the taxable property for at least five years before it becomes a non-taxed supply.

If you intend living in the property as you work on it, the warranty provisions still apply when you sell, up till the time as prescribed at law. Capital gains tax is a separate section of tax law and will not usually apply to trading stock because you will be paying income tax rates on the profit.

And if you are not living in the property as a principal place of residence, it definitely is an investment property, in which case you will need to make sure you have plenty of information regarding legal, insurance, and tax requirements before you buy anything.

The ATO have excellent Field Officers who deal with this type of enquiry all the time. I recently had the pleasure of sitting with two very well prepared Officers who had gathered lots of case histories and information to answer my questions (I had faxed them four pages of questions prior to our meeting).

Keep in mind, that any income earned outside the PAYG system requires you to have an ABN. However, having an ABN is just like having a Tax File Number, except the TFN system works within the PAYG system.

Anyone (tax entity), regardless of income, can be voluntarily registered for GST, but if you provide more than $50,000 per year in taxable supply then it is compulsory for you to be registered for GST.

Joan, you (or anyone else interested in this) are welcome to email me and I can send you on specific contacts regarding this information. I start the Registration for Builders Course at Holmesglen this week (weekends till December). It is a 205 hour course and is now the minimum academic requirement prior to application for registration as a domestic builder. Experience is assessed separately. I have no intention of doing work for other owners as a contract builder, but I don't want to get started in this business, then find myself limited to one deal each five years.

Check out the ATOlaw website: (copy and paste this URL)

http://law.ato.gov.au/atolaw/view.htm?basic=+margin&&docid=AID/AID2001588/00001

this URL should take you through to the ATO legal Database " ATO Interpretative Decisions - GST miscellaneous
ATO ID 2001/588 - GST and margin scheme for sale of property originally purchased after 30 June 2000 under the margin scheme".

Obviously, the information which I have offered in this post are my interpretations of the tax situation as explained to and understood by me. If someone has a different understanding of how the system works, I am happy to hear it. In the meantime, the websites should give you plenty of information to give you a general idea of what is involved in setting up as a professional renovator!

Good luck

Kristine
 
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Reply: 2
From: Dale Gatherum-Goss


Hi Jane

>My husband is a builder & we
>run a small construction
>business. All our work to
>date has been residential and
>commercial work for clients.
>We have several IP which we
>have bought & intend to hold.
>
>We would like to start to buy,
>renovate & sell residential
>properties for an income to
>supplement/replace our work
>for clients.
>
>We have had an offer accepted
>today on a residence which
>would be ideal for this
>purpose.
>
>My question is the GST & CGT
>implications of this. I rang
>the ATO 3 times today with and
>received conflicting advice.
>I rang our accountant, who
>rang the ATO and his advice
>differed again. My queries
>are:
>
>- If we plan to renovate &
>sell, can we claim back the
>input tax credits on services
>and materials used in the
>renovation?


A lot depends upon the extent of the renovation that you do. If it is cosmetic and does not change the structure of the house, then NO, you should not claim back the GST and neither will you charge GST when you sell the house.

However, if you do extensive renovations that change the structure of the house, then Yes you can claim back the input credits because the sale of the house will be the sale of a "new" house and as such will include GST.


>- If we decided to keep the
>property after renovation for
>an IP or if the property
>failed to sell at a suitable
>price and we rented it out for
>a period, how would this
>effect the GST?


See above comments, but, if it is a major renovation that effectively creates a "new" house then you can claim back the input credits. However, if you place the house for rent then you have to hand back the input credits that you have already been refunded. Furthermore, you will need to lodge an amended BAS again if the house was to sell anywhere within the first five years after the renovation.


>- Are there GST implications
>on the purchase and sale of
>the property?


Yes there is. You will buy this house without GST because it is a second hand house. However, depending upon the extent of your renovations (see above comments) you will either sell the house GST inclusive or without GST.

This will, of course, need to be factored into your budget and plans.


>- Is there CGT on the net
>gain of the project, or is the
>profit included in our usual
>Profit & Loss accounts and
>income?


If this is something that you intend to do more of, the profit will be ordinary income and taxed as such as opposed to under the CGT rules.


Good luck and I have attached a link to a tax office record that you would do well to review as I think that you will find that it contains the answers.

http://www.taxreform.ato.gov.au/content.asp?doc=/content/19878.htm

Dale
 
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Reply: 2.1
From: Kristine .


Dale

What a wonderful link!

I've downloaded it for future reference.

Half the trouble with finding the needle in the haystack is finding the haystack in the first place!

Thanks

Kristine
 
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