Non resident property developers

Question

Married couple Australian Citizens with Current Non Resident tax status (residing in country without tax treaty) is considering purchasing land with a current house on it. The house could be rented out for a period if advantageous or demolished on purchase to subdivide into 3 blocks for sale.

They just sold the last bloke of land doing the same thing as an investment previously renting the house out first for a couple of years then demolishing and subdividing into 3 blocks.

Trying to determine best structure to purchase property through. Individual names, Trust or, Company. (“Friend” said best register as company developer as less tax).

Property will be purchased for cash without any bank loan.

They have no current Australian derived taxable income.

Confused about how would be classified if as developer or in business of developing & GST requirement and CGT consideration especially with foreign resident tax rates applying what best option if to pay on tax on any gain split 50% at 32.5% or higher or pay Company Tax (assume need Australian resident director but not for trust?) then pay dividend as if non resident for tax not declared in tax return.

Assuming profit on one bloke more than 75,000 if GST registration neccesary.

Answer

Please refer to our Expats booklet to cover other issues to be considered. Please read all of it as there is just so much that is relevant.

Now to your question:

As non residents they are not entitled to the 50% CGT discount anyway. Now assuming they are going to offload this property before they return to Australia we don’t have to think about CGT when choosing an entity.

Companies don’t get the CGT discount so normally I am against them but it does not matter in this case. Note the company pays a lower rate of tax but the money would need to stay in the company for the tax to be limited to this amount. Once it comes out of the company, say into their hands then it is taxed at their marginal rate with a credit for the tax paid by the company (franking credit) if they are a resident at the time. If they are not a resident for tax purposes when they receive the dividend then they will not be entitled to use the franking credit. Normally when there is a double tax agreement it declares that the place of the shareholder’s residence has the only taxing right of the dividend and there is no withhold tax deducted because of the franking credit being lost but it might not be the case with their country.

If their plan is to subdivide, sell and retain the profits to go again, then a company certainly looks like the right structure. Especially if they intend returning to Australia in retirement, they can slowly take the profits out of the company then and utilise their franking credits while the gradual distribution will keep their personal tax rate low.

If on the other hand they intend for a future development to be their own home or held as long term rentals during a period they are residents of Australia they may regret the company.

You really need more personal advice and a crystal ball.

A company will need an Australian director but a trust will need a company as the trustee anyway. Too risky for a person to be the trustee.

GST is certainly going to apply and it is important all the contracts for the sale of the blocks have a margin scheme clause. Below is an article out of our how not to be a developer booklet that explains the margin scheme

GST Margin Scheme

Basics:

  •  The margin scheme can only be used with a house and land or land. If the seller is registered for GST the margin scheme can only be used where the property was owned pre 30th June 2000 or purchased under the margin scheme. Or if the seller, who is registered for GST purchased the property from someone who was not registered for GST
  • The margin is the amount of the selling price on which GST is calculated.
  • The purchaser of a property under the margin scheme cannot claim any GST input credits back on the purchase price. But if they are registered for GST they can claim GST input credits for further expenditure on the property.
  • On 17th March 2005 a bill was introduced to Parliament that will require a written agreement signed by both parties on or before settlement for the sale to be subject the margin scheme.

Property Purchased After 30th June 2000:

  • If you are selling a property you purchased after 30th June 2000 and the price you paid was calculated under the margin scheme section 75-5 allows you to only charge GST on the difference between the selling price and the cost to you of the asset that was measured under the margin scheme. Note any improvements to the asset after purchase do not reduce the margin. For example a GST registered developer buys land for $66,000 from someone who is not registered for GST. The developer spends $100,000 (after claiming back input credits) putting a building on the land and sells the property for $200,000. If the GST on the sale is calculated under the margin scheme it will be 1/11th of $134,000 ($200,000 – $66,000). On 17th March 2005 a bill was introduced to Parliament to make it clear the margin must include the cost of improvements and to stop abuses of this area.
  • Note there is one dubious exception to the above ID 2002/30 states that the price you paid for the property, as calculated under section 75-10 (i.e. the portion that is not subject to GST when you sell) includes any adjustments for land tax or council rates you may have paid at settlement. But ID 2002/31 states that this does not include legal fees.
  • You cannot use the market value to set the cost under the margin scheme if you purchased the property after 30th June 2000. This is the case even if you did not register for GST until after the purchase

Property Purchased Before 30th June, 2000:

  • If you owned a property before 30th June, 2000 you need to set the amount that is not subject to the margin scheme. This is the value of it at 30th June, 2000 or when you first became registered for GST, whichever is the latter.
  • GSTR 2000/21 details how to set the value as at 30th June, 2000 or when you first became registered but note this is only for property held before 30th June, 2000.
  • If the property is fully complete the value can be set by a qualified valuer or the amount set by the government for land tax or council rates purposes.
  • If the property is being developed at the time you require the valuation you can use a value set by a qualified valuer or use the cost of completion method.
  • The cost of completion method determines what percentage of the total costs the costs that have been incorporated into the project at the date of valuation are. It is this percentage of the selling price that is not subject to GST. Note this method can only be used if the property is sold before 1st July, 2005 and owned by you before 1st July, 2000.

Summary

  1. If you buy with the intention to resell at a profit normal income tax and GST apply
  2. If you are merely realising an asset purchased for investment or private use CGT applies to the sale
  3. Business premises or farms may be able to keep the whole transaction tax free by using the active asset concessions. This involves careful planning before you even start.