GST on Residential Property development -Please help

[PaulaP]

Hi everyone,
Do I have to register for GST on a once off residential development in Victoria, Australia?

I am currently in the process of building 2 residential town houses to sell, and my accountant has advised that we must set up an abn and register for GST.
I don't want to do this, but at the same time I don't want the tax department chasing me later on either, so I am wondering if there are other possible better options.
This is my situation....
- I have formed a partnership agreement with another person for this project (only an agreement was drawn up by a solicitor, nothing through asic)
- This is Once off project.... We will not be doing this again.
- Old House was purchased (about 2 years ago), now demolished, has been subdivided, and 2 houses being constructed on 2 separate titles. Due for completion mid next year by a home building company.
- We are not in the building trade or have previously developed properties for profit, like I said this is a once off.
- We have borrowed all funds for this project.

This project has been an ongoing saga, and things have gone wrong, causing delays along the way, and have cost us alot of money. There may still be a little bit of profit at the end of all this, but the last thing I want is that profit eaten up by GST and accountants fees, only to find out later on it could be avoided.
I will be going back to my accountant, but I would like to be equipped with some more knowledge, so any advice on this would be much appreciated. TIA

 

[Erica]

Hi PaulaP, welcome to Somersoft!

I am not an accountant- but I will try to relay what my accountant explained to me:

There are only 2 legal ways to avoid paying Goods and Services Tax upon selling a NEWLY built home:
1- make it your principle place of residence or
2- own it and rent it out for 5 YEARS

It seems as though your accountant is giving you good advice-
if you register for GST now you can claim GST CREDITS on all the goods and services you pay in the construction of the new house, then you will only pay the ATO the difference between GST credits and the GST charged once sold.

 

[Erica]

email from my accountant about GST:

OK I found the email my accountant gave me when I asked if I'd have to pay GST if I sold my newly built house (my first development where I've only just built 1 house after subdidiving the backyard off an old home):

"Ordinarily a property developer, which you are not at this stage, constructs new residential premises for the purpose of sale, and the sale is part of the enterprise (business) that the developer is carrying on. Where they are registered for GST, they would be entitled to input tax credits for any acquisitions they make that relate to the construction of those new residential premises.

The reason is that the expected sale of the new residential premises will be a taxable supply, and the extent to which the acquisition is for a "creditable purpose", will determine the amount of input tax credits claimed.


The term "business" and "intention" are both grey, and based on a question of fact and degree. The more evidence you have to substantiate the position you take on either or both - the better.

Circumstances may arise where the new residential premises may not be sold after being built but, rather are, leased. For example, a developer has completed the new premises but is unable to find a buyer, so they may decide to lease the premises until a buyer is found, to get some return.

Previously, if the property had been constructed for disposal, but was instead leased prior to being sold, it was the opinion of the Commissioner, that the premises had only ever been applied for a purpose of making input tax supplies of residential rent. Accordingly this meant that the input tax credits claimed associated with the development of the property had to be returned to the Australian Taxation Office. If the property is sold, within five years, a proportion of those input tax credits could then be claimed back

GSTR 2009/4, which provides guidance. This ruling outlines how to determine the extent to which an acquisition made in constructing new residential premises is applied for a creditable purpose i.e. prior to the sale the new residential premises was leased for a period of time.

Effectively, if you register and ABN with GST entitlement prior to construction, and you plan on renting the new premises, you cannot claim any GST back, as it is classed as an input-taxed supply.

If you register an ABN/GST prior to construct, and you plan to sell, whilst you can claim back the GST on the build cost, you will have to remit GST on the sale price, including that of the land (for which you haven (claimed anything upfront), unless you elect to use a method called the "margin scheme", meaning your actually only remitting the GST on all profit made.

If you don't register, you cant claim on the build, but also you don't need to pay any GST on the eventual sale, if that occurs after renting. However if you sell inside 5 years, technically you would be able to claim some GST back (except for the fact that you aren't registered during that period), but also then would still be liable to remit GST on the sale.

HOPE THAT HELPS

 

[MRO]

At face value I agree with your accountant.

You bought the property to develop, you will be selling new residential property and GST will be included in the sale price.

No where to hide with this one.

 

[PaulaP]

Thank you Erica & MRO

Thanks so much for your advice.
I had a feeling that there wouldn't be much way around it.
My accountant did mention using the margin scheme also, so hopefully that will help.
Maybe we should consider keeping as an investment for 5-6 years and rent out, because rentals are strong here and the properties are in a great area that's in demand. I will have to do the figures on this, and come back with more questions
Thanks again

 

[Scott No Mates]

You will have to weigh up whether selling a new IP today and reaping a profit to use on the next project is better than realising a profit in 5 years?