Ask Ban Tacs Question
We bought a block of land and built a house on it with the intention of selling it on completion.
The house did not sell so we rented it for 3 years.
We have re-paid some of the gst that we claimed during construction,by adjustment each June BAS over the last 3 years, in accordance with a schedule from our accountant.
The tenant has now moved out and we are considering selling the home.
If we do sell now, is the profit a capital gain or income and what do we do with gst?
Is gst payable on the sale
We settled on the land on 4/7/06, the house was completed by the builder in Sept 07 and then we completed the finishing items and tried to sell it for about 8 months.
We then decided to rent it, the tenant was there from June 2008 to July 2011.
Answer
It sounds like you are holding the property as trading stock. We need to split this issue into two questions.
Firstly whether you get the 50% CGT discount.
If a transaction is caught by the income tax provisions CGT cannot apply. While ever you hold the property as trading stock you will not get the 50% CGT discount because income tax will apply. To qualify for the 50% discount you need to change your purpose to holding for investment (and pay back GST discussed later). Obviously you can’t say you have changed your purpose from holding for sale to holding for investment and then go and sell the property. The section below shows that you can however change your mind and be deemed to have acquired the property at its cost and now holding it for investment. PBR 90780 also looks at this situation and accepts that you can change the purpose for which you hold a property. SO basically if you were to sell now, no the CGT 50% discount would not be available.
Subdivision 70-D – Assessable income arising from disposals of trading stock and certain other assets View history reference
Operative provisions
SECTION 70-110
70-110 You stop holding an item as trading stock but still own it View history reference [No equivalent]
If you stop holding an item as *trading stock, but still own it, you are treated as if:
(a) just before it stopped being trading stock, you had sold it to someone else (at arm’s length and in the ordinary course of business) for its *cost; and
(b) you had immediately bought it back for the same amount.
Example 1:
You are a sheep grazier and take a sheep from your stock to slaughter for personal consumption. You are treated as having sold it for its cost. This amount is assessable income, just like the proceeds of sale of any of your trading stock.
Although you are also treated as having bought the sheep for the same amount, it would not be deductible because the sheep is for personal consumption.
Example 2:
You stop holding an item as trading stock and begin to use it as a depreciating asset for the purpose of producing your assessable income. You are treated as having sold it for its cost. This amount is assessable income, just like the proceeds of sale of any of your trading stock.
You are also treated as having bought the item for the same amount, which is relevant to working out the item’s cost for capital allowance purposes (see Subdivision 40-C) and the item’s cost base for CGT purposes (see Division 110).
Note:
A transaction that this section treats as having occurred is disregarded for the purposes of these provisions of the Income Tax Assessment Act 1936:
• subsection 47A(10) (which treats certain benefits as dividends paid by a CFC)
• paragraph 103A(3A)(c) (which affects whether a company is a public company for an income year).
Now to the GST part of the question. The ATO recognizes that you could be renting the property out but still holding it for sale so you only have to pay a small portion of the GST back as per the schedule you mention. This is discussed in detail in GSTR 2009/4. The trouble is while ever you do this you are claiming that the property is still your “trading stock”. When you sell the property you will still have to charge GST on the sale even though you have lost some of your input credits.
Once the property has been used as a rental for a continuous period of 5 years then it will not be subject to GST on sale and you will have to have paid back all of the GST credits. Though, this is probably a better outcome than paying GST on the sale.
