pre-sell - automatically classed as developer?

[Oshawott]

hi,

have read thru previous posts before about intent as a key point (but not only factor of course) when being considered an investor or a developer.

can anyone give some thoughts about this scenario:
want to build a few units with intent of holding for rental income and CG. However, banks require me to pre sell a couple units as a condition of the loan.

since the pre-selling part is a term imposed by lender and if given the chance i would like to hold all units.... where do i fall in the ATO's eyes? developer or investor? GST implications?

thanks very much.

 

[Ausprop]

straight forward - enterprise. You can't demonstrate an intention to do anything other than build and sell because that is in fact what you would have done.

GST applicable, no CGT applicable, all earnings will be on the revenue account.

you can claim GST inputs though


That's for the units you sell.

I have been told - and may soon be corrected - that you can develop with some on the capital account and some on the revenue account in the same enitity. Alternatively you could develop in 2 entities... one registerd for GST, one not?

 

[Terry_w]

Its not just the intent but the actions or steps you take. Sounds like you intend to develop and sell if you sell before developing.

 

[Paul@PFI]

The ATO ruling considers a range of factors but come back to the common law need for a "mere realisation" to support a CGT basis. A good example used in their ruling is that of a couple who plan to marry and buy a future home- its rented and then they break up.

This is very different to a venture where a intention to generate wealth is planned. Sure the bank is imposing a requirement to sell down and reduce debt but that's just part of the enterprise. You can expect ordinary income tax to apply to this dev + GST.

There are a range of strategies that can be used in this case so that cost and GST impacts are minimised and to ensure maximum deductions etc are identified.eg some of the issues :
- Margin scheme
- Apportioning
- Costs need to be available BOTH GST inclusive and exclusive
- Depn schedules for some properties need to be GST inclusive and others GST exclusive
- Structure
- Land Tax
- Reasonable basis for apportioning - You may need a valuer or a strata specialist to identify that % for each unit.

For the units you do hold sure CGT may end up applying and GST may not apply where your intent is to hold LONG TERM. I'm not talking 2 or three years either. The longer the better. In your mind you should be thinking "I'm not going to sell them" for CGT to be a consideration.