Tax on building & selling spec homes

[craig73]

Hi, just wondering if someone can shed some light on the tax payable when building then selling spec homes.

As an example let's say (rough figures):
$180,000 for the land
$170,000 for the house
$350,000

And then there's all the other costs (rough figures again):
$5,000 Stamp duty on land purchase
$20,000 Bank interest during construction
$5,000 Bank interest while trying to sell it
$2,000 Borrowing costs (valuation, loan app. fee, gov. duty etc)
$1,000 Construction loan fees / monthly account keeping fees
$2,000 Council rates
$2,000 solicitors (buying land and then selling house)
$13,000 real estate agent's commission
$50,000

So the total cost to buy the land, build a house and then sell it (including fees and interest etc) would be say $400,000.

If the house was to sell for $450,000 that would be a real net profit of $50,000

Is this the way the ATO sees it? Or are there some things which are not considered in the total cost, therefore increasing the capital gain. For example if the agents commission is not considered then the total cost would become $387,000 and then the profit would become $63,000 - making the tax bill more. I'm also unclear about expenses incurred after construction while trying to sell, like the interest, insurance, rates etc.

Thanks in advance, Craig.

 

[poppy]

Pretty much all costs that you have not already claimed up-front can be added to the cost base when you sell, as far as I know.

GST might be an issue though. If you always intended to build the property to sell, then I believe GST has to be paid. If you built the property as a rental, and then due to changed circumstances had to sell it.. you might not have to pay GST.

 

[craig73]

Hey there, I hope your house is going well. I haven't been to the estate for a while but I plan to go tomorrow and will try to get a pic of yours again while I'm there.

We haven't made any claims yet which may be a good thing since the market doesn't look good here for selling at the moment and we may end up making it a rental after all.

I must admit I was unaware of GST being an issue and I am not too sure how it works. Are you saying that if the house sells for $450k we will have to pay $45 GST? If so then I think we have built ourselves a new rental. I feel quite silly for not realizing this, I'll try and look on the ATO website to find out more.

Craig.

 

[poppy]

Hi Craig,

Thanks, our house is slowly coming along... at the frame stage now.

The bantacs website has a "how not to be a developer" booklet which you may find useful regarding the GST.

http://www.bantacs.com.au/booklets.php

 

[craig73]

Thanks a lot for the link to that website, I think I managed to gain some understanding from it. So 1/11 of sale price will be GST - but the GST paid by the investor whilst building can possibly be claimed. I read that the ability to claim GST credit somehow depends on if a margin scheme was used further up the chain (whatever that is). It all looks very complicated and ambiguous to me, especially regarding the initial intent of building the home. Definitely a big lesson learned here though.

As mentioned selling looks very grim at the moment, there are a lot of homes in the estate that have been up for sale for months and it seems nothing will happen in the near future either.

Our naivety may have been a good thing though in that we didn't claim GST credit during development, and so when the final touches are completed in the next couple of weeks we will put it up for rent and hold it.

I have PM'ed you with a pic I took of your place today - it's looking really good.

All the best, Craig.

 

[poppy]

I think I managed to gain some understanding from it. So 1/11 of sale price will be GST - but the GST paid by the investor whilst building can possibly be claimed.

Yes I believe that's the way it works.

On the positive side, if you have changed your intentions and now want to keep it as a rental, the interest and other expenses such as rates should be able to be claimed up front from the date you changed your mind, even if the property is not yet completed and available for rent.

 

[davewill]

Hi,
My understanding is that GST is payable on the improved value, that is the sale amount minus the land value. You should get this confirmed by an accountant.
But a rough calculation on the figures you gave earlier I would estimate like this:
Land Value:180k
Sale Value:450K
GST on Sale: (450k-180k)*10%=27K.

You will be able to claim back the GST charged to you during the development stage, which would prob be about about 17k.

If the you hold the property for a year or more after completion you will not get charged GST but will havew to refund any GST claimed during construction.

 

[Dunsborough]

confused
hey guys i am confused, but that is nothing new, i read this as a queery about cgt (capital gains tax) not gst, was that what queery was or was it in fact about gst which i admit is a interesting question as well?
cheers

 

[davewill]

Yes it is a bit confusing, i was just replying about the cost of GST.
Calculating CGT can be very confusing too...I think that to be eligible for the discount you need to hold the property for more than a year from completion on the building work not from when the property was purchased???
My rough attempt at above figures would be:

Total Cost: 387K (Land+Build+other, not including agent fees)
GST cliamed back 17K (guess)
Total Project cost 370K
Sale 437K (450k-13k agent fee)
GST on Sale: 25,700 (437k-180K)
Total Proceeds 411,300
Capital Gain: 41,300

Craig is best suited to check with an accountant as these figure a pretty rough.

Cheers Dave

 

[craig73]

Thanks for the responses. Yes the initial query was about CGT but as Poppy mentioned - it is not CGT but GST that would apply in my case.

I thought GST was meant to simplify taxation, but from what I have read it looks horrendous.

Craig.

 

[Aimjoy]

I thought GST was meant to simplify taxation, but from what I have read it looks horrendous.Craig.

And the lesson is: Always be wary of any govt. that wishes to "simplify" anything. It ALWAYS ends in more red tape than previous. Just look at the Tax Act today compared with 20 years ago......

 

[craig73]

On the positive side, if you have changed your intentions and now want to keep it as a rental, the interest and other expenses such as rates should be able to be claimed up front from the date you changed your mind, even if the property is not yet completed and available for rent.

The fact that we can't claim anything before we changed our minds is pretty rough I think. If we were to sell it as planned then all of that interest would have been claimable - if it was always going to be a rental then all of that interest would have been claimable.

The other problem is since it was built for resale and is now going to be rented, we can't claim GST credits but if we ever did sell, it would still have GST on the sale price.

I'm wondering how many people out there would be honest enough to admit it was originally built to sell.

 

[davewill]

Hi Craig,
You wont be charged GST on the sale if you hold the property longer than a year from completion. Interest/costs accrued by you befoe you changed your intention will add to your cost base.
Dave

 

[craig73]

Oh I see, well that's fair enough then.

Thanks, Craig.

 

[asdf]

Hi Craig,
You wont be charged GST on the sale if you hold the property longer than a year from completion.

Where did you hear this from? I thought it was 5 years you had to rent it out for. If you don't register for GST and get a PAYG job flipping burgers then you shouldn't have a GST liability. If you are going to be making on the deal, claiming input credits then having to pay the GST on sale pricewill be an ultimate cost to you, whichever way you cut it. Best just don't register in the first place.

 

[letiha]

Craig,

We have recently finished 3 places in Brisbane, originally they were going to be rentals, then we thought about selling, then back to selling. Who knows what our intentions were from day to day.

If you end up renting out as soon as possible after it is constructed just claim for the interest during construction on the land etc. that is what we have done because our propertys are rentals and should have 12 months leases on both this afternoon.

 

[davewill]

Where did you hear this from? I thought it was 5 years you had to rent it out for. If you don't register for GST and get a PAYG job flipping burgers then you shouldn't have a GST liability. If you are going to be making on the deal, claiming input credits then having to pay the GST on sale pricewill be an ultimate cost to you, whichever way you cut it.

Hi, I went through the process of developing a block of land several years ago, ended up selling the land with DA/CC as the building costs and my lack of experience in developing meant that the risk was too great.
Part of that process I looked into holding some units vs selling, got advice from our accountant re the implication of GST/CGT. From memory they told me one year...I could be wrong. I have a written report somewhere in my files if anyone is really interested, may take several hours to find! One of the interesting things I do remember is that the starting time for GST and CGT calculations are different.
"Best just don't register in the first place"
If you dont claim GST credits during construction doesnt mean they wont charge you GST on sale. It all comes down to whether you as considered a developer instead of an investor. As always anyone doing a development should get proffessional advice themselves.

 

[craig73]

Thanks Letiha,

Can anything else besides interest be claimed during development eg rates, bank account maintenance fees, construction loan fees, borrowing costs like mortgage duty, house insurance?

What worries me about claiming as if it was always a rental is we had it listed a short time while we were finishing things like tiling, carpets and landscaping etc. We're still just having the blinds done but it is off the market and with a PM now. I'm thinking the listing was captured by rpdata so we may have to do things the difficult way i.e. the costs incurred while it was meant for resale would be added to cost base and expenses when it became a rental can now be deducted, sigh...

Our accountant will be sorting it out but I want to find out as much as possible before I pay him a visit and start blabbing about all of our stupid "intentions".

Craig.