Self managed super fund, residential property and GST

Question

I own a self managed super fund. The fund purchased land (GST free) 3 years ago and soon after built a residential premises. The property is not being rented, instead it will be held by the fund for 5 more years as an investment then sold to myself (member of the fund). The fund also owns 3 commercial premises which are rented. Rental income is only $40,000per annum. Also the fund is registered for GST.

I believe that if my situation does not change then the fund will have to pay GST when the property is sold to me as it will be considered as "new residential" property.

My questions are 1. will I have to charge GST on the land given that I did not pay GST in the first place and 2. can I simply deregister for GST and avoid having to pay GST on the sale. I am assuming that I will have to amend my BAS and pay back any GST that I have already claimed on the construction of the residential premises.

Thank you

Answer

You are certainly right about GST applying to the sale if the SMSF continues to be registered for GST.

The use of the margin scheme will mean that you don’t pay GST on the original purchase price of the land. Here is an article from our How Not To Be A Developer booklet on the margin scheme.
• If you are selling a property you purchased after 30th June 2000 and the price you paid did not include GST section 75-5 allows you to only charge GST on the difference between the selling price and the cost to you of the asset. 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. The buyer must agree in writing to the use of the margin scheme.

If you de register for GST yes you would have to pay back the input credits you have claimed on the house. As you are holding it for investment, not for resale you should have already done that. But worst still is that if you de register you will have to pay back the input credits on any purchases where the adjustment period has not expired regarding the commercial properties. This could mean refunding 1/11th of the purchase price. Note even if you purchased under a going concern clause you would still be required to pay back the notional GST. The adjustment period depends on the amount of the invoice. Here is a link to the info from the ATO site. https://www.ato.gov.au/Business/Bus/Making-adjustments-on-your-activity-statements/?page=5
Basically the first adjustment period is 12 months after the first 30th June after the date of the invoice. Then every year after that. It applies to all invoices over $1,000
Table 1A: Adjustment periods for most purchases and importations
Value of the purchase or importation (GST-exclusive) Number of adjustment periods
$1,001 to $5,000 2
$5,001 to $499,999 5
$500,000 or more 10

So it may be possible that you don’t have to pay the GST back on the commercial properties if they cost you less than $500,000 and you have held them for more than 6 years but as for the house it is residential premises. The only reason you were entitled to claim the input credits was because you were holding it for resale not for investment. It is considered trading stock up until the time you pay back the input credits. As it is trading stock its sale is part of your turnover so counts towards the $75,000 threshold that will require you to be registered for GST. SO you can’t say well it is no longer held for resale and then sell it fortunately you have another couple of years so now is a good time to ask the question.

Certainly you will have to pay all the GST back on the house because you are going to have to say it is no longer held for resale so that your turnover goes below $75,000 so you can de register. Check out the ramifications for the other properties the SMSF owns you may also have to pay the GST back on other purchases that make it not worth the GST saved on the house. Further your tenants may want to pay you 1/11th less rent because they can no longer claim an input credit. This all breaks even in the wash but you will no longer be entitled to claim input credits on any expenses relating to these properties with no corresponding increase in rent.

The sale of the house to you will have to be at market value of course.

And finally I am surprised that your SMSF auditor allowed you to do this as it looks to me like the SMSF is holding the property for your benefit to buy in the near future and as a result not meeting the requirement that the assets of the fund must be held for the sole purpose of providing for your retirement. After all it is not even earning rent from the asset.

AS you can see this is a big issue, please go over it in detail with your accountant.

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