gst and margin scheme

Question

Hi
My wife and I signed up to build a rental property. We signed up to buy land and subsequent house on 28/8/10. At this time I was earning reasonable money.We took possession of house at end July 2011 .To save costs we were doing , or organised tradespeople, ourself to finish house. My work was looking a little less secure at this time so in between getting house finished and renting , we let my mate put the house on market for 3 weeks in case we had offer too good to refuse ho ho!!!!!. Anyway we finished house and continued with existing plan of renting.We had tenants take the house on 14/9/2011.

I got laid off mid November and have struggled for work since only picking up part time contracting work. Wife works but not full time. It is now a struggle to finance the rental house and Im looking at going back to college to help my job prospects.I would like to keep it because for what we built it for we could probably make quite well out of it in 5years. It is now just a weight around the shoulders at the moment.
We are looking to see if we can sell the rental without making a loss on our outlay.I have been told I may have to pay gst and can use the margin scheme…

My question……..Is it correct I have to pay gst and what sort of amount would I pay on the rough figures mentioned below. Can I still get the 50% CGT rebate also.

Land 172500 with costs 180000
Build 171000 without interest payments over year

Rough sell price 390000 there would be about 8000 cost to sell

other info
If I sell total costs to me would be approx 370000 including everything ( interest and fees)
The house is in joint names ( probably mistake after last tax return)
We are not gst registered
I have been self employed since february
thanks

Answer


My answer hinges on your ability to convince the ATO that you built the house with the intention to rent it out, not resale.

In ID 2008/114 the ATO even recognises that you can change your mind. As you have never claimed input credits on the construction of the house it is pretty clear that your intention from the start was to hold it as a rental property.

If you hold a new property as a rental for a continuous period of at least 5 years, it is no longer considered a new property so GST does not apply to the sale.

If you sell a rental, that you built, in less than 5 years your sole argument to avoid the GST is that it was not built for resale so is not part of your business turnover (ie stock) but instead the sale of a capital asset of your enterprise of holding properties for rental .

In these circumstances you are not required to register for GST. If you are not registered for GST then you cannot charge GST on the sale even if technically it is a GSTable supply because it has been a rental for less than 5 years.

The legislation works as follows:
If you are not already registered for GST you are not required to do so just because you choose to sell a property you built with the intention of holding as a rental. Section 23-5 states that if the annual turnover of supplies you make in the normal course of your enterprise, exceed $75,000 you must register for GST. Section 185-25 excludes from the calculation of annual turnover the supply of a capital asset. Building the property for rental then selling, is the supply of a capital asset and not included in the annual turnover. Section 118-15 excludes from annual turnover input taxed supplies so any domestic rent received is not included in annual turnover.
If the margin scheme did apply (which it doesn’t because GST does not apply) you would only be subject to GST on the difference between the selling price and the original price of the land. Using the figures you provided $390,000 – $172,500 = $217,500 /11 = $19,773 almost all your profit but then you would also be entitled to GST input credits for the building costs. Note to use the margin scheme the purchaser must agree. The margin scheme only applies when there is no GST in the original purchase price of the property or the original seller of the property used the margin scheme. If you purchased from a developer I doubt either of these would be the case.
The 12 months to qualify for the 50% CGT discount starts from the time you signed the contract to buy the land so it has well and truly been covered. If you are seen to have built the house with the intention of resale rather than rental then you will not be entitled to the 50% CGT discount.
In conclusion because you built the property to hold as a rental investment you do not have to pay GST on the sale and will be entitled to the 50% CGT discount.

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