I have a trust set (owned 50/50 by 2 trusts)
up with the following:
1000sqm block – one old house rented out and building strata – new house at the back of the block – rented out – 2 years old.
in Geraldton wa.
1250sqm block in Frankston South VIC with old house and granny flat. currently rent out. Looking at building 4 town houses
and renting all four out. If I get to a position that one needs to be sold to reduce the debt, will I need to charge GST? and I guess I would need to reg. for GST – can we claim GST against this on builders invoices and then do we need to pay GST on the remaining properties even after 5 years of renting them out ? does this have further tax problems ? or could we sell one sub divided piece of land off before the building goes on ? Please feel free to call on 0400 137 076 if its easier to explain.
I am a bit confused about your structure and the first property but I don’t think it makes any difference to my answer. Basically your question is will you have any GST liabilities in any of the circumstances described. I think this is best answered by explaining the law in detail in this area. It will give you a better idea of your options but please don’t just act on this advice, make sure you go over your plans in detail with an accountant.
If you are not already registered for GST then you will not be required to register for GST until your turnover of supplies subject to GST is expected to exceed $75,000 (net of GST) for the year. Residential rents are not subject to GST so they are not included in the $75,000 test. Note it refers to turnover not all sales. This means that only trading stock and items purchased with the intention of resale are included. If you sell a property that you have done something more than just merely realise it (ie built a house on it rather than just cut off a block to sell as vacant land) or if you sell a property you purchased with the intention of resale then it will be included in the turnover test and force you to register for GST. Once you are registered for GST then you must charge GST on any sale of an item by that registered enterprise, that is subject to GST, if you are not registered and not required to be registered (refer discussion above) then you do not have to charge GST even though it is a supply of an item that is subject to GST. The sale of vacant land or the first sale of a new house is subject to GST if the owner is registered or required to be registered.
For the benefit of making sure your advisers are on the right track here are the references:
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.
The difference between a new house and vacant land is simply cutting off a block to sell after originally buying the land without the intention of subdividing and selling will not force you to register for GST because you are merely realising an investment asset, you are not in business. With a house you construct you have been more business like. The construction of a house to sell cannot be considered merely realising an asset. But the construction of a house to hold as a rental and later selling it can be considered merely realising an asset, providing it was not your intention to sell when you started planning the construction. Proof rests with the taxpayer.
Of course the catch is being able to prove your thoughts ie that you didn’t intend sell any of the properties but cost blow outs forced you to sell one off so you could afford to hold the rest. Alternatively, if you hold the property as a rental for a continuous period of 5 years then it is no longer considered to be a new property so not subject to GST anyway, whether you are registered or not. The 5 years does not start when you buy the land and rent out the old home. It has to wait until you rent out the newly construction home.
If you accept that you are going to build one of them for resale right from the start then yes you can claim back any GST paid to the builder etc for that particular unit, you will need to apportion. Then when you sell make sure the buyer agrees to the use of the margin scheme so you can effectively not pay GST on the portion of the sale price that represents the original price you paid for the property apportioned to that unit.
If you don’t claim the input credits back but later sell the property and the ATO ping you for GST then you can go back and claim input credits based on the formula discussed below but only for invoices for more than $1,000 within their adjustment period so it will possibly be a lesser amount. This de minimis rule works best the other way around.
If you claim the GST back on construction and then keep as a rental property for a while you will have to start paying the GST input credits you received back proportionately, very messy here is an article from our how not to be a developer booklet that explains how this works:
Developers who hold to Rent
GSTR 2009/4, in a very timely fashion addresses the GST considerations when you build a property to sell but due to poor market conditions decide to rent it out for a while.
The problem is that during the construction period you would have claimed all the input credits back. If a property is used to produce domestic rental income then you are not entitled to claim the GST back on the costs of its construction.
Don’t panic, you do not have to pay the GST back straight away and you may only have to pay back a very small portion if you continue to list it for sale while you are renting it out. Or intend only renting it for a short period of time and then putting it back on the market.
You do not have to worry about paying back any input credits until the first adjustment period which is 12 months after the first 30th June after you claimed the GST and you only have to look into invoices for more than $1,000 GST exclusive.
Now if you have taken it off the market completely and decided to keep it as a rental for an indefinite period of time then you will have to pay back the GST. If, instead you are still holding it to sell or will at least put it back on the market in the near future then you can use the following formula to determine how much the GST you are entitled to keep.
Selling Price Plus Rent Received
So if the selling price is 950,000 and the rent received is $50,000 then you are entitled to still keep 95/100ths or 95% of the GST so only 95% needs to be paid back. Note the selling price used has to be what you could sell it for in the current market.
If you are living in the property while you are waiting to sell it you can substitute market rent in the above formula. Adjustments do not need to be applied to costs associated solely with selling the property such as advertising it for sale.
Here is a link to the whole booklet that you may find interesting http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf