GST and CGT

Question

Jan 2010 purchased vacant land with my friend as tenant in common with 50% owned by each.

2 homes were constructed on it. construction finished in july 2011 and they are rented since then. subdivision i.e. 2 separate titles completed in March 2013. We both have 50% ownership in each new built strata titles.

I am not registered for GST. I am a salaried employee. I do not know whether my friend is registered for GST or not.

My friend has other investment properties acquired before and after 2010.

We did not plan to sell it after construction.


Can you tell us whether we are liable for GST and CGT if we sell it now? Are we required to register for GST ?

Also, i want to know supporting arguments for your view. I have read your article titled "How not to be a developer" it says about proving intention at time of acquisitiion of property. But how we can prove intention to ATO ?


Answer

The onus of proof is on you and you are on the back foot when your intentions are to hold long term but your actions are a relatively short term hold. The best defence is to have a plausible reason as to why you changed your mind. For example needing the funds for some other unforeseen purpose and not having anything more liquid to meet that need or no longer being able to afford to prop up the property financially, again unforeseen. Maybe even something new affecting the area that will make it difficult to find tenants in the future, such as a huge subdivision being marketed to investors. Usually while this marketing is happening prices are good because the developer is promoting it. That is a good time to sell before over supply brings down prices and rents. The emphasis being on the rents as selling price should not affect a long term hold decision.
Now if you want certainty before you sell and commit yourself irreversibly to the possibility of the ATO coming along later and asking for the GST, then you had better apply for an ATO ruling on the matter.
You would be asking them if they consider the sale of the property to be the sale of a capital asset (an asset purchased with the primary intention of holding rather than resale for profit) because your intention when you built the houses was to hold as rentals but now due to ………. You are forced to sell sooner than expected.
If the ATO rules that the sale is indeed a sale of a capital asset then you are not required to register for GST because your turnover of supplies subject to GST is under $75,000, reference section 23-5. Turnover does not include the sale of a capital asset, reference section 185-25. If you are not registered for GST then even though the first sale of a new home is subject to GST you will not have to charge it.

Alternatively you could wait another 2 ½ years to sell, once a new home has been used as a residential rental property for a continuous period of more than 5 years it is no longer subject to GST because it is no longer considered new, reference 40 35(1)(a).

As for CGT it will apply even if GST does not. But if you are considered to have built the property with the primary intention of selling for profit then normal income tax applies so no 50% CGT discount. Again the onus of proof is on you to show what your intention was when you build the houses basically the same argument as for GST above.

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