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My son recently purchased an old house that is on land zoned for units. We plan to form a JV or partnership, demolish the old house and build 6 units. My son is overseas at present and has been for a few years. He is not registered for gst but I am. I will be using my money for all development costs and at the completion of the units, the plan is that my son will keep 2 units and 4 units will be mine. My son will keep his 2 units long term as a rental investment. I will sell my 4 units asap. I realise that GST will apply to the sale of the 4 units. I presume that I will be able to claim gst credits throughout building but can I apply the margin scheme… ie as my 4units sit on 2/3 of the land can I apply 2/3 of the purchase cost of the house when calculating the gst that needs to be paid re the 4 units sold? Will my son have the benefit of the 50% capital gains discount if he sells when he returns to Australia in a few years time? (I realise that any profit that I make, will be taxed as income) Thankyou
Answer
This is a huge question in fact it is many different ones, as listed below. You really need to sit in front of a professional and discuss this. I toyed with the idea advising you on all the options and the whole project but I really need your interaction as there are so many questions. Instead I have given you some vital points on the issue that should affect your decision making process and help anyone advising you on the curly issues. Please make sure you also read our how not to be a developer booklet which is under freebees on the web site.
For business or investment – Certainly you have entered into the arrangement with the profit making intention as discussed in the booklet so full tax and GST. Your son on the other hand appears to have entered into the transaction with an investment intention. Even though he may have had the intention of demolishing the original house he appears to have still had the intention to build rental properties so not a profit making scheme. As such GST would not apply to his side of the development. The trouble is section 51-10(3) requires that a participant in a joint venture must be registered for GST. As he is building the units for rental he would not be entitled to claim GST input credits during the development process but would be up for GST if he did not keep the units as a rental for a continuous period of 5 years. Though once the joint venture is finished he could choose to de register and if he is not registered at the time he sells the units and is convincing in that his intention was not to build for resale at a profit then no GST is payable on the sale. If GST is payable on the sale then he will be entitled to input credits on the construction but less than the full amount because it has been used as a rental for a period of time.
Joint Venture verse partnership – Bascially the difference between a partnership and a joint venture, is what you get out of the deal. If you get a share of the product of the operation it is more likely to be a joint venture. If you get profits it is more likely to be a partnership. You can structure your arrangements to become either but the ATO’s point of view is, if you receive a share of the profits as opposed to a share of the product from a venture then it is a partnership rather than a joint venture. This is very relevant to your situation because in order for you to receive a share of the produce your son would have to transfer the title of some of the properties to you which will no doubt involve stamp duty. You can appoint a nominee to sell the properties and transfer to you the gross proceeds of the sales even though they are in your son’s name. A joint venture would need legal documentation. Generally a joint venture is arranged between two unrelated people because they want their liabilities and rights clearly defined. This maybe an unnecessary complication between you and your son and consideration should be given to him operating the project as a sole trader and you being paid for your involvement but giving him time to pay for your services. The financial outcome may in many ways be the same but it may reduce solicitor and accounting fees.
Parties form a Joint Venture so that they share the risk. For example if you son simply engaged a builder he would have to find the money to make progress payments and would also be taking a gamble on the eventual selling price exceeding costs. In a joint venture the builder would share some of this risk. But in your case I imagine the risk would be shared regardless of the arrangement.
Even if you operate as a joint venture only one entity will deal with the GST transactions for both of you. It will probably be you but in a separate capacity than that of a member of the joint venture. It is like you would be an agent for the joint venture as well as being a member of the joint venture.
Your son as a sole trader – You could just bill your son for your services, factoring in the profit you would have made when you sell the units but not require him to pay until the units are sold. He would certainly have to register for GST anyway. You would charge him GST and he would claim approximately two thirds of it back because four are built for resale and two for rental. Again the 5 years before selling issues would apply to his two, as discussed above. This doesn’t really make much difference than in a joint venture except for the lack of complexity in your entity setup. You may want to seek legal advice on his risk of being sued. And have plenty of evidence that it was always his intention to build the two properties he keeps, as rental properties, not for resale at a profit, so that he will qualify for the 50% CGT discount.
Non Resident – As a non resident your son is taxed at 29 cents in the dollar right from the first dollar of profit. As his taxable income increase beyond the threshold when a non resident would pay more than 29 cents in the dollar then his marginal rate is increased to that of a non resident but he does not have to pay Medicare. If he already has a superfund account in Australia he would qualify to make tax deductible superannuation contributions up to the capped amount and he will qualify for the 50% CGT discount just like a non resident. Of course he won’t get the 50% discount on the ones he built for profit. By the way the 12 months to qualify for the 50% discount starts at the time he bought the land, subdivision and building the units does not change the acquisition date.
Margin Scheme – If your son does the project in his own name then yes he just applies 2/3rds of the original cost to the 4 units he is selling. Now if you did this as a joint venture and he actually ended up transferring the units to you there would be no GST payable on that transfer to you but your sale of them would still be considered the first sale of the units. I doubt this will be the direction you go in because of the unnecessary cost of transferring the units. I expect the most likely outcome is that they will still be in your son’s name when they are sold so the margin scheme will operate as discussed above.
