We purchased an old house in 2010 with the intention of demolishing the existing dwelling and building a new duplex. At the time, we intended to retain both of the new townhouses as investment properties. We did not register for GST.
Now that the buildings are almost finished, we are undecided on the best course of action. Should we sell and free up capital or retain the properties as we originally intended?
We would like to know the tax implications of the two options so that we can make an informed decision.
It should be noted that there is no question we are operating this project as a business. We intend to continue to buy further development sites and have always operated this project as a business. The legal owner of the land is a company as trustee for a discretionary trust.
If we decide to sell the properties, then it appears to me that the tax consequences are easy. We will need to remit GST on the sale and the net profit will be assessable as ordinary income (not a capital gain). However,
1. Can we register for GST now and claim input tax credits on all the GST we have paid since the beginning of the project?
2. If so, is this just a matter of claiming all the input tax credits on the first BAS return or is there a special procedure?
If we decide to hold both properties and do not register for GST:
1. My understanding is that if we hold the properties and rent them for a minimum of 5 years, then we will have no GST liability. Is that correct? Does it matter that we are in the business of property development?
2. If we hold the properties for at least five years to avoid the GST liability, can we then also claim that the profit is a capital gain and get the benefit of the 50% discount or will it still be considered ordinary assessable income?
If we decide to hold both properties AND register for GST:
1. I have read somewhere, that if we register for GST, we can claim all the input tax credits on the project, but we must repay this to the ATO after the property is rented for 12 months. Is this correct? In other words, is it possible to register for GST and claim the input tax credits (approx. $45,000) and treat it as an interest free loan for 12 months?
How does the above advice change if we decide to sell one unit now and hold one unit for at least five years?
Just a bit of discussion about your thoughts first.
If you purchased the property with the intention of building residential rentals to keep then you may have been business like but you are in an input taxed industry. If you have no other properties at the moment and are not already registered for GST you are not required to do so just because you choose to sell a property you built with the intention of holding as a rental. Section 23-5 states that if the annual turnover of supplies you make in the normal course of your enterprise, exceed $75,000 you must register for GST. Section 185-25 excludes from the calculation of annual turnover the supply of a capital asset. Building the property for rental then selling, is the supply of a capital asset and not included in the annual turnover. Section 118-15 excludes from annual turnover input taxed supplies so any domestic rent received is not included in annual turnover.
If you are not registered for or required to be registered for GST you do not have to charge it. In short if you didn’t build with the intention of selling then in theory you don’t have to charge GST but your problem is convincing the ATO what your thoughts are. I wouldn’t just give up and pay. At least apply for a ruling as the GST and not qualifying for the 50% CGT discount is going to be a huge cost. You cash flow may even be better to hold and borrow against them. BTW the 12 months for the 50% CGT discount starts from the date you purchased the original property there is no reset when you change the nature of the property.
Let me be very clear, in a perfect world where the ATO are not bullies and you could prove your thoughts you could sell these units that you built as rentals because your circumstances have changed and as long as you are not registered for GST at the time you do not have to charge GST and on the same basis of argument that you didn’t build to sell you qualify for the 50% CGT discount.
Keeping them for 5 years as you suggest will also solve the problem even if you do other properties for sale.
Lots of money at stake so please at least ask the ATO for a ruling on whether they believe your thoughts were pure rather than just pay up.
Now in direct answer to your questions:
Deciding to sell and accepting GST applies:
1) It would be best to back date your GST registration, you risk fines for late lodgement of BASs but the ATO will probably remit these especially seeing as they owe you.
2) If you are not registered for GST when you incurred the expense (ie you don’t back date your registration), I doubt but am not sure that you can go and claim those input credits back until you actually sell the property, change of use.
Decide to hold both and not register for GST:
1) That is what the 5 year rule is all about, it allows property development business that hold some for rental but because of other build and sell have to be registered for GST, to not have to pay GST on their rental stock. My preference is that you only hold this development in this trust anyway and never register it for GST so when you sell in 5 years it is not an issue and if you may be able to sell sooner without having to charge GST if the ATO doesn’t question your thoughts ie you have a unexpected need for the funds.
2) The 5 year rule doesn’t need to apply in this case because it is only helpful if the owner is registered for GST. If you hold them as a rental for 5 years I see no reason to register for GST. If you are going to do other build and sell projects do them in another trust. This is a good strategy anyway as building sites are dangerous places so having other assets in the same trust as the one that owns the building site is an unnecessary risk. As discussed above if you build to hold as a rental and there is no evidence to the contrary and you keep the properties for 5 years then I doubt the ATO will challenge what your thoughts are so no need to register for GST and qualify for the 50% CGT discount. Big incentive to keep them as a lot of money involved. If you hold these properties as an investment ie you did not build them to sell and the ATO accepts your thoughts were pure then you get the 50% CGT discount.
Hold but register for GST
1) Technically you can do this if your original intention was to build and sell, it is 12 months since the first 30th June after the input credit was claimed so a bit longer than 12 months. You can then change the purpose to a rental but don’t attempt to sell them any time soon after that or the ATO will be saying it was all a business. Alternatively they could be held as a rental while trying to sell and then you only have to pay back a portion of the GST. There is are a few articles on this on page 20 in my How not to be a Developer booklet that will give you the detail. http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf
Also have a look at page 24
Sell one hold other
This is fine just treat each one differently as two separate assets but make sure you de register for GST after you sell the first one or you may have problems if you have to sell the second within 5 years.
This is a very big question, beyond the normal size for askbantacs. So I have answered in a way that gives you the important facts you need to know but please do not act on this advice alone, you need to have a long considered discussion with an Accountant that knows all of your circumstances.