Help working out GST & CGT

manny

manny

Howdy there,

I've stumbled across a cheap block of land the owner is wanting to sell (privately well below market value). I was hoping to build a spec home on it & on-sell, but am confused on the GST component when selling (as I would be paying GST for the building of the spec home). Figures look as follows:

Block of land for $125k (valued above $150k, but may even get it cheaper)
Building & gardening of spec home for $200k
Holding costs, stamp duty, etc. say $20k
Sell for $390k (after paying for agent's commission).

In theory, 390k-20k-200k-125k=$45k profit. As the block is existing (subdivided in the 80s) & the price of the house (say $200k is incGST), on which component would GST need to be paid on OR would you just pay CGT on the $45k?

This will help deciding on whether this project would be viable...

Cheers,

Manny.
 
manny said:
Block of land for $125k (valued above $150k, but may even get it cheaper)
Building & gardening of spec home for $200k
Holding costs, stamp duty, etc. say $20k
Sell for $390k (after paying for agent's commission).

In theory, 390k-20k-200k-125k=$45k profit. As the block is existing (subdivided in the 80s) & the price of the house (say $200k is incGST), on which component would GST need to be paid on OR would you just pay CGT on the $45k?
Click to expand...

Lets see

(390k-125k)/11= $24,090 GST charged on sale
GST claimable = ($200,000 building + $11,220 Agents commission on sale + $4,000 estimated GST inclusive holding costs)/11 = $19,565 claimed back
Total GST estimated to pay to ATO = $4,525.

Capital gains tax = sale $366k ($390k-24k)
costs = $125k land + $211k (building costs + agents commission + holdings costs - gst claimable) = $336k
Capital Gain = 30k

Total rough profit = $25k - capital gains tax payable.

Those holding costs seem quite high. Let me know if I missed something out.
 
Hi Mry,

thanx for the prompt response (I did use rough figures & the holding costs may be a little high, but using higher figures as a worst case scenario)...

what if I'm not registered for GST? I wouldn't be able to claim back the GST (that would change the whole equation). Would you advise on registering for GST before commencing this project?

Cheers,

Manny.
 
manny said:
what if I'm not registered for GST? I wouldn't be able to claim back the GST (that would change the whole equation). Would you advise on registering for GST before commencing this project?
Click to expand...

Being registered or not registered for GST isn't the issue at hand. What matters is if you are required to register for GST, in which case whether or not you are registered makes no difference, you have to register or face the consequences. If you breach the $50,000 limit, you must register for GST as required by law. If you do not, the ATO are within their rights to demand payment for a full 1/11 of your sales from the date that you would be deemed to breach the threshold in addition to penalties and interest.

For example, the sale of new residential premises for an amount over $50,000 would force you to register for GST and force you to charge GST on the sale of the property. Now, if you aren't registered for GST during the time that you build the property, you will be unable to claim back the GST on those expenses but required to charge GST on the sale of the property. You would lose $19,565 in GST credit claims. You can backdate the registration of course.

In short, register from the date that you start incurring GST claimable expenses.

EDIT betterer english
 
Hi Mry,

thanx for the prompt response, greatly appreciated...

Could you register the family trust for GST for this project & then de-register it for GST (as I was hoping to complete this project under the trust name) once completed?

Other option is conducting this whole exercise under the wife's name who has an ABN & her registering for GST for the project then de-registering (due to having almost $0 taxable income)?

Cheers,

Manny.
 
manny said:
Could you register the family trust for GST for this project & then de-register it for GST (as I was hoping to complete this project under the trust name) once completed?

Other option is conducting this whole exercise under the wife's name who has an ABN & her registering for GST for the project then de-registering (due to having almost $0 taxable income)?
Click to expand...
You couldn't really deregister for GST until 12 months have passed, but you can cancel your ABN if you have ceased running an enterprise (NAT 3844). The reason you can't cancel is that you jumped over the threshold and the ATO try to stop people jumping in and out of the system (eg you register for GST, buy a car, and then deregister, then get paid $30,000 for a job, etc, etc).

As for whose name it should go in, thats up to your accountant. I don't mind talking about the tax effects, but when it comes to applying it to people's situations, that requires the opinion of someone who knows your situation.
 
Manny and Mry,

Some considerations if you are borrowing around 80% for the project. If you aren't borrowing, then more power to you.

Land in-costs 4% (duties and solicitor) = 5k
7mths holding Interest 8k
Rates for 6 mths 1k
Total 14k

Just be aware Manny that draughtsmen's final plans and building certifier approval can stretch out to 4 weeks, and construction can take 20-26wks, especially if a turnkey finish.

BUT then you have to find a buyer.

You want to keep it in mind your holding costs after completion are $1800/mth.

If I were you, I'd be trying to line up a buyer before finishing, and especially via private advertising. Why give a REA a third of your profit. If you build a nice home in a location the market likes, it will sell itself.

The other thing you might consider is holding it as an IP for 5 years. No GST payable, and you get the growth and equity.

Mry, I take it if Manny was buying the land from a developer, he'd be better off not agreeing to the margin scheme, so he could claim input credits on the gst paid. Would appreciate your comments.
 
WinstonWolfe said:
The other thing you might consider is holding it as an IP for 5 years. No GST payable, and you get the growth and equity.
Click to expand...

Ahh really? Thats great then. I thought you always had to pay regardless of when you sold. Anyway, I've made an appointment with my accountant to nut things out.

Can you still claim the GST credits on construction etc, even if you hold as an investment for 5 years?

Cheers guys

Grimey
 
Thanks mate.

My situation is I'm building a duplex which I plan to rent out, But things may change and I may sell. I may sell 1 and rent the other. So it makes if difficult as to whether I can claim the GST tax credits or not. But I don't want to sell and not have claimed the tax credits!

I would appreciate any accountants on here giving me some advice :)
 
similiar question

I have been reading through, and was wondering if someone could help me with this issue:
We purchased land that was zoned commercial, paid GST.etc
Land was rezoned to residential, we owner-built 2 villas.
We claimed back GST expenses along the process of building.
The money for all this was borrowed from the bank.
We rented them out for 3 months and they have now sold.
What do we pay GST on?? The total sale price or we deduct fees etc? Like the others before us, we have had many conflicting answers :confused:
Total sale was $374
Agents commision and other fees were approx $13K
Need to pay bank back $304K Building expenses etc.

Hoping someone can help
Thanks:)
 
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