Hi All,
Before I pose any questions consider that our IP strategy is to accumulate as many CG focussed IPs as we can comfortably afford to hold for the medium to long term. "Comfortably" to us means aiming for an overall investment portfolio that is close to cash flow neutral (minimal or no cost to us after tax). It seems to me that we need to find a way to generate extra income in order to achieve this. I've discussed this idea and related options at greater length in other posts and won't go into the specifics in this post.
Anyway, as a possible option to generate income/cashed in Capital Gain to cover for Neg Gearing losses I was doing some numbers on the benefits of selling IPs (Buy renovate and onsell OR small development with a view to onselling at least some of the IPs). In doing this I realised in alot of cases GST seems likely to be payable on the resale of the IPs. I need to get my head around the likely impact of GST on the costs of any such projects to determine the viability of such options.
From my limited reading of the ATO website and other posts here it seems that GST is payable on All New Properties, but that renovated properties can be deemed "new" for the purpose of GST depending on the extent of renovation carried out. (If anyone knows how much reno makes a property subject to GST let me know?) Also, the ATO seem to have changed the wording relating to the need to have an 'intention to sell' or the sale being for a 'business purpose' from at the time the IP is "purchased" to while it is "held" which seems significant (not a direct reference to ATO material just my interpretation of it). This seems to indicate second hand properties, if renovated, may also be subject of GST. But I also noted IPs held for more than 5 years are not subject to GST. (Confused yet?)
My readings also seem to indicate that GST is charged at 1/11th of the sale price, and that any GST paid during the purchase, reno/development, & sale process can be offset against the GST owing on the sale price (we don't own IPs purchased more than 5 years ago so I don't think the Margin calculating method is relevant?). So the process of working out GST would be something like this (fictional numbers);
Sale price = 550k
GST = 50k
GST paid during purchase, reno & sale = 10k
GST Owing = 40k
How much GST is likely to be paid in the purchase, reno/development & sale process I'm not sure? Hence the 10k is just a guess not based on anything much. If claimable GST is likely to be more than this or there is anything else that reduces the GST owing I'd like to hear about it. But if this was anywhere near the mark having to pay GST could significantly erode the likely profitability of such a sale.
Also, if GST was payable on Renovated IPs I would think the claimable amount paid during the purchase, reno and sale process would likely be less than for developments (due to less expenditure overall and therefore less GST paid that is claimable). This would leave a bigger GST bill owing for renovated properties than for new properties, of the same sale value. Very simplistic I know and feel free to correct me if this is not the case.
So are there others that accumulate IPs to hold, while at the same time selling IPs (whether originally purchased specifically for the purpose of resale or not) to realise profit (to offset NG losses for example)? How do you structure your portfolio / execute the sale of IPs for this purpose to minimise tax?
How significant do the GST costs end up being when assessing the feasibility of short term buy & sell IP options (or the sale of IPs already held that may be deemed to be subject to GST)?
Thanks for your help,
MF35
Before I pose any questions consider that our IP strategy is to accumulate as many CG focussed IPs as we can comfortably afford to hold for the medium to long term. "Comfortably" to us means aiming for an overall investment portfolio that is close to cash flow neutral (minimal or no cost to us after tax). It seems to me that we need to find a way to generate extra income in order to achieve this. I've discussed this idea and related options at greater length in other posts and won't go into the specifics in this post.
Anyway, as a possible option to generate income/cashed in Capital Gain to cover for Neg Gearing losses I was doing some numbers on the benefits of selling IPs (Buy renovate and onsell OR small development with a view to onselling at least some of the IPs). In doing this I realised in alot of cases GST seems likely to be payable on the resale of the IPs. I need to get my head around the likely impact of GST on the costs of any such projects to determine the viability of such options.
From my limited reading of the ATO website and other posts here it seems that GST is payable on All New Properties, but that renovated properties can be deemed "new" for the purpose of GST depending on the extent of renovation carried out. (If anyone knows how much reno makes a property subject to GST let me know?) Also, the ATO seem to have changed the wording relating to the need to have an 'intention to sell' or the sale being for a 'business purpose' from at the time the IP is "purchased" to while it is "held" which seems significant (not a direct reference to ATO material just my interpretation of it). This seems to indicate second hand properties, if renovated, may also be subject of GST. But I also noted IPs held for more than 5 years are not subject to GST. (Confused yet?)
My readings also seem to indicate that GST is charged at 1/11th of the sale price, and that any GST paid during the purchase, reno/development, & sale process can be offset against the GST owing on the sale price (we don't own IPs purchased more than 5 years ago so I don't think the Margin calculating method is relevant?). So the process of working out GST would be something like this (fictional numbers);
Sale price = 550k
GST = 50k
GST paid during purchase, reno & sale = 10k
GST Owing = 40k
How much GST is likely to be paid in the purchase, reno/development & sale process I'm not sure? Hence the 10k is just a guess not based on anything much. If claimable GST is likely to be more than this or there is anything else that reduces the GST owing I'd like to hear about it. But if this was anywhere near the mark having to pay GST could significantly erode the likely profitability of such a sale.
Also, if GST was payable on Renovated IPs I would think the claimable amount paid during the purchase, reno and sale process would likely be less than for developments (due to less expenditure overall and therefore less GST paid that is claimable). This would leave a bigger GST bill owing for renovated properties than for new properties, of the same sale value. Very simplistic I know and feel free to correct me if this is not the case.
So are there others that accumulate IPs to hold, while at the same time selling IPs (whether originally purchased specifically for the purpose of resale or not) to realise profit (to offset NG losses for example)? How do you structure your portfolio / execute the sale of IPs for this purpose to minimise tax?
How significant do the GST costs end up being when assessing the feasibility of short term buy & sell IP options (or the sale of IPs already held that may be deemed to be subject to GST)?
Thanks for your help,
MF35
