My first investment property I had been acquired on 24 March 2005 as a block of land (600sq.m) with existing old house built on this land with intention to rent it out for long term.
Due its obsolescence this old house required sufficient capital improvement. Then at the end of 2008 I decided to demolish the house, subdivide the land and to build two new houses with intention to rent them out for long term. Old house was rented for nearly 5 years before it was demolished. New houses were completed in December 2010. One of the new houses is already rented out.
Due financial hardship I am considering the possibility to sell another one with the aim to raise funds required to manage my personal cash flow.
I am in full time position working for SA Government and I don’t carry any business activity as a property developer or builder and I am not registered for GST.
Before I made the final decision whether to sell this property or not I sought two independent advices from tax practitioners. Their responds confused me as I received two contradict opinions in regards to whether I would become liable for GST on selling my property or not.
First opinion is that on selling my new residential property I would be liable for GST on the ground that this property falls under definition of new residential premises (s.40-75 GST Act 1999) and cannot be input taxed supply (s.40-65 GST Act 1999). Hence, GST liability will arise on taxable supply when this premise would be sold.
Second opinion is that I will not be liable for GST because in my particular circumstances I am going to sell my property NOT in the course of or furtherance of an enterprise and it is just mere realisation of CGT asset. Thus, such sale does NOT fall under definition taxable supply (s.9-5(b) GST Act 1999). Hence, no GST liability will arise on selling this property.
I personally support this opinion as in fact I don’t carry any business activity as a property developer or builder and selling of this property is mere realisation CGT asset.
Please advise do I need to be registered for GST before I sell the property and then after the settlement to be deregistered.
In case if I need to be registered how much GST do I need to pay?
House was bought 24/03/2005 for $209000.
Subdivision and demolition -$30000
Land was subdivided to two 300 sq. m blocks
House to build $150000
House was valued $370000 (Let’s assume I can sell the house for that price).
Can I use the consideration method of the margin scheme if I was not registered for GST when I build the house?
Thanks for your service.
I agree with the second accountant, good on you for seeking a second opinion. Whatever you do don’t register for GST. Here are the section numbers and relevant argument
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.
So in short sure the first sale of a new home is subject to GST but if you are not registered for GST you do no have to charge it and the law does not require you to register because it is the sale of a capital asset you built with the intention of using as a rental, so its sale is not part of your normal turnover.
Your only concern is being able to convince the ATO that you built it with the intention of holding it as a rental. The onus of proof is on you.
Yes, if GST did apply (which it doesn’t) you would be entitled to use the margin scheme, if the buyer agrees. This would quarantine from GST the market value of the project up till the time the ATO decides you started to build it to sell.