Sale off the plan – GST and CGT/Income Tax implications

Question

I purchased a house in 2007 which I proceeded to rent out. In 2011, the backyard was subdivided with a second dwelling built and then also rented.

The old, existing house was demolished a few months ago. That lot is in the process of being subdivided into two lots with construction started on two new units. The house built at the rear is still held and continues to be rented.

If one of the units under construction is sold off-the-plan –

a) am I liable to pay GST? If so, can GST paid previously to the architect, builder, etc, during planning and construction be offset?

b) will the sale be subject to CGT or be assessed for income tax?

c) will the answers to the above change if
(i) the other unit is subsequently sold, either off-the-plan or shortly after completion; or, alternatively, if
(ii) both units are rented out for 12 month before one or both are sold?

Some background information:

Intentions:
a) The house built at the rear and subdivided was intented to be rented out (and continues to be currently tenanted).

b) The development of the units currently under construction was commenced with the intention of creating rentable dwellings to be held long term as retirement income. The old, existing house could have continued to be rented but would have required exstensive, expensive repairs to maintain a good rental condition.

c) Subsequent to committing to the latest development I came to the view that I was too focused on property and concentrated in one area. To diversity and protect my income stream long term and to reduce risk by lowering debt I decided to sell one of the units being constructed.

Ownership: The propertys are held personally. No company or trust structures are involved.

GST status: I am registered personally for GST for a business activity that has no connection with property. I’m not a builder, don’t have a property development business nor connected with property in any way but as an investor and landlord.

My active involvement in the development and construction of the units in progess (and, previously, in the development of the house at the rear) is largely limited to:

a) engaging an architect to produce plans and obtain town planning permission

b) contracting a builder to obtain all further approvals, including a building permit, and undertaking the contruction and obtain the occupancy permit.

I don’t have any direct involvement in engaging or directing subcontractors, etc, for the development and construction of the units.

The only peripheral exception being the hiring of a surveyor and legal services for subdivision and conveyancing, as well as engaging a real estate agent to market one of the new units off-the-plan.

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Answer

a) Yes GST applies, make sure you use the margin scheme, you can claim GST back on the inputs into the property but make sure you apportion if part of the whole project. If you haven’t already read it you should find this booklet interesting and it explains the margin scheme http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf
b) CGT applies to the gain before it was committed to this project and income tax applies to any profit after that.
c) Each unit should be evaluated on its own circumstances except that the ATO will use one being built for resale as a sign that both were built for that reason, it is up to you to prove different. To not be subject to income tax and GST the onus of proof is on you to convince the ATO that it was your intention to build to rent as the primary purpose. To do this you really need to keep as rentals for 5 years or have an unforeseen change of circumstances that forced you to sell sooner. Changing your mind half way through the building process probably won’t wash.


I have been very direct on my answers here because there is more than one question and askbantacs is supposed to be an individual question. Happy to elaborate in another more specific question if you need me to. But it seems to me from your choice of words that you have read the How not to be a developer booklet. You have missed one crucial point in applying the booklet to your circumstances. Your arguments revolve around claiming that you are merely realising an asset. This would be fine if you are selling vacant land but once you go beyond simply doing the minimum that council requires of you to subdivide then it is considered that you are no longer merely realising an asset in the most profitable way, you have put on your business hat by building whether you do it or engage someone to do it. The only saving grace you have in these circumstances is to argue that you are not in the business of building property to resell but in the business of investing in rental properties, primary purpose rental return and secondly capital growth over the years. Your circumstances of course refute this on the surface.

The catch for you is if you decide to see if you fly under the radar and later the ATO catches up with you and applies GST you will be very hard pushed to use the margin scheme so your GST will be much higher, not to mention the penalties. So if you really want to try to argue that your original intention was to keep as a rental I suggest you obtain a ruling from the ATO that they believe you.

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