I have been negotiating with a local landowner (who has owned the land pre CGT) to assist in sub-division and development of his block.
He wants to build and live on the bottom block, we want to build and live on the top block, and our SMSF wants to build a house on the middle block as a JV with the vendor.
I am in transition to retirement with a segregated Payment fund, which can fund our part of the JV. Our SMSF is GST registered.
The JV intends to maximise its profit probably by renting the completed house, but possibly by selling if house prices look good on completion in 2 years.
I understand the sale will be GST free only if we rent for 5 years, and that the fact our SMSF is GST registered will not compromise this (different enterprise?).
Alternatively I understand my SMSF can claim GST credits on building costs and sell the building on completion (to an external buyer or the JV partner?), but be liable to pay GST on the margin scheme. If our SMSF sold to the JV partner, would any subsequent sale be GST free, since not the first sale of the house?
What would be the position if our SMSF claimed GST credits on building costs, but then the JV rented for five years?
Can you suggest any appropriate arrangements to maximise our profit?
I am assuming the landowner will organise the subdivision of the land into 3 blocks. These blocks will continue in his name and still retain their CGT free status after subdivision, this is very important for the block he will keep. I am also assuming because it was so long ago that he did not buy the land with the primary purpose of resale at a profit so he will not have to charge GST on the sale of the top block to you. Once he has sold the top block to you personally you can build your home there without any complications for you as it is simply your main residence. The landowner would not have to pay GST or CGT so hopefully will have the funds to build his home. That is all very tidy and not complicated by tax.
The problem lies with the middle block.
If either of you build on the middle block with the intention of selling then the sale will be subject to GST. This would be the case whether the owner is registered or not as the sale would be part of its normal trading stock so, as the turnover would be more than $75,000 the owner will be forced to register for GST, though the margin scheme will reduce the GST applicable to the profit on the land.
If on the other hand you build with the intention of holding as a rental property then, if the owner is not already registered for GST, it will not force the owner to be registered because the future sale is not part of its turnover. You are correct about the need for a new property to be rented for a continuous period of 5 years for it not to be subject to GST on the sale but this is only if the owner is registered and it was not built with the intention of resale at a profit.
And yes once the property has been sold as a new house the next sale will not be subject to GST.
If you build a new home and rent it out you cannot claim the GST credits back on the building, if you have because you thought you were going to sell it then you have to pay them back. A portion of them can be claimed back again when you do sell if you have to charge GST on the sale. The percentage of GST credits you can claim back is the percentage the sale price is of the total of both the sale price and all rent received.
You will also need to confirm with your SMSF auditor that he or she will consider the joint venture in the middle property to meet the sole purpose of providing for your retirement. He or she may also be concerned that the building of the house for resale means that the SMSF is carrying on a business which is against the rules.
Big issues here, please make sure you read our How Not to be a Developer booklet available free in the booklets section, hopefully that will help make the points above clear. It also has all the references you need to rulings and legislation.
Note that if the land owner simply contracted to you to build the rental house (ie the land never changed hands) then you would have to charge GST on the house but get all the input credits back. There would be no transaction involving the land so no stamp duty and no CGT or income tax, for the landowner. The property would maintain its pre CGT status, only the house would be post CGT and as it is usually the land not the house that goes up in value this could be very profitable to the land owner.
Lots of issues, make sure you run your finally strategy past an accountant before you start anything.