Ask Ban Tacs Question
We (me & Spouse as joint tenants) recently purchased IP with intention to rent. Land is zoned for apartments so we have decided to build units and rent our share of units. To reduce the risk (financial and liabilities during construction phase), we plan to form a JV with our company (me and my spouse are joint directors). Company will manage entire project (demolish the old house, approval, architecture etc and build 10 units).
Land is our contribution to JV and company will be bringing development expertise and sourcing money for all costs related to development. At the project completion, the plan is that we will keep 40% of produce-4 units(long term renting >5years) and 6 units will be for company to sell asap (off the plan, prior or during the construction phase) and make profits. Individually, we are not registered for GST but our company is.
I understand that GST will apply to the sale of the 6 units owned by company (intend to use margin scheme & claim gst credits proportionately throughout construction on 60% of invoice (6 units)).
1. We interpret that we will neither claim nor pay GST when we sell our share of 4 apartments (after 5 years) and will also have the benefit of the 50% CGT discount – Is this correct interpretation?
2. Since we are entering in JV, understand that we are sharing produce (units). In one of your answer to similar question (Answered by julia on Tue 03, Nov 2009 08:02am), you mentioned about appointing nominee to sell company’s share of units to avoid stamp duty by first transferring them from our name to company’s name). How will this work in our case as company intends to sell its share of produce off the plan and apply margin scheme. Land title is in our personal names so who will be signing O&A contract- Us or Company appointed nominee?
3. Preference is for Company (registered for GST) to be JVO so company can claim 60% of GST on building invoices straightaway- Builder will issue all invoices to our company as construction loan will be taken by company. Is this OK?
4. When will the tax liability trigger for company as it’s selling off the plan (in O&A contract year (FY14/15) or settlement year(FY15/16)- construction period will be about 14 months starting Dec,2014)
5. Will ATO raise eyebrows as this JV happens to be between us and our company rather than an independent (arm’s length) company? Will having additional unrelated directors in company reduce the impact on the way ATO interprets it? – hypothetical question but interested in your view.
6. What evidence (apart from not claiming GST) we should keep to prove ATO that our original intention was to keep our share of units as rentals if they challenge it when we ultimately sell our share of units.
Answer
The askbantacs fee covers 1 question not 6. I will give you a short answer to the 6 to help you work towards your next question where we can be more specific. I cannot find the question about using a nominee company that you refer to so this is just based on the question you have provided
1) Yes correct if they are used as a rental property for more than 5 continuous years
2) If the property is in your name it will be you that will be selling the units not the company unless you pay the stamp duty to transfer them to the company first. You would then pay the company what you owe them for the construction. I can’t see why you would go to the complication of undertaking a JV. You will still have the exposure of being the land holder and the company will be exposed to the builders liability regardless of whether there is a JV or just fee for service. A JV is an expensive and complicated arrangement and will force you to be registered for GST as a member of the joint venture arrangement. You are going to have to register for GST regardless.
3) Just get your company to do this and enter into a building contract with your company that may be a bit higher than you would pay elsewhere because your company is prepared to wait until you sell for payment. Nevertheless it would all have to be on a fair market amount taking all this into account.
4) I suggest it would be you selling off the plan and you are in business. No doubt you will be registered for GST on a cash basis the GST is claimable when paid and payable when the sale proceeds are received. In your case I suggest the company go along each quarter claiming the GST back on all the project then bill you payable immediately for 40% which will have GST charged on it but you will not be claimed back and the 60% payable when you sell so the GST input credit and GST you have to pay will probably be in the same quarter.
5) As long as everything is at market rates it will be ok otherwise the ATO may come along and deem market rates
6) What you tell the bank will help, ultimately the onus of proof rests with you.
