I purchased a property in march 2008 in the name of our discretionary family trust,with the intention to use as a rental property.It was rented for a period of 14 months.At this point in time severe structural termite infestation & water damage was discovered & it was determined the dwelling was to far gone to be repaired & unfit for occupancy,so was demolished.Due to the now vacant block costing money to hold(rates maintainance)it was put up for sale with a local agent.After more than 6 months & no offers to buy,the agent suggested that because of its location & zoning it could be more attractive to potential buyers if 4 strata titled units were constructed on the land,which iam currently in the process of obtaining planning approval for.My question is What gst & tax implications are there? Would i qualify for the 50%CGT concession on profit(held more than 12 months)?Any other implications & or tax rulings that apply. -property purchased in the name of trust(discretionary-income protection,myself wife 2kids) -purchase price $241k + costs (legal stamp etc) -Build cost $475k inc gst Demolish $8k inc -Sale price $230k per unit x 4 $920k inc gst -I am a builder by trade registered for gst -I have completed another unit project 3 + years ago not involving the trust but in my name only Your help would be greatly appreciated.Cheers Steve
Your description of the stages of owning this property are a perfect script to argue you are merely realizing an asset (50% discount and no GST) but the wheels fall off when you get to the bit about building 4 strata titled units (MT 2006/1). This is where you cross over to being in the business of property development because you start on a venture that is more than simply preparing the asset for sale in the best possible light. If you would like to know more about this line there is a lot of detail, cases and examples in our How Not To Be A Developer booklet in the freebies section of our web site.
Now if you can convince the ATO that you did not buy the property in the furtherance of an enterprise initially but bought it as an investment and only changed your mind when you started the unit development then you can effectively qualify for the 50% CGT discount on any gain to that date, though it is not quite that straight forward. I think the ATO would be asking why, considering you are a builder, you did not spot the damage before you bought. Some sort of independent validation of your intentions would be good. Nevertheless, you are entitled even as a builder to have property that is not part of your enterprise. In the 1998 explanatory memorandum for GST at paragraph 3.10 the example was given of a car dealer selling his or her private car would not be part of their enterprise, so not subject to GST.
Here is how the tax works:
For Income Tax Purposes:
If we say that you commenced the townhouses at the point where you applied for the DA then the business brings the land into account at its market value at that point. If this is classed as a one off profit making scheme rather than that the townhouses are trading stock then you don’t have to worry about paying any tax on the process until you sell a townhouse. Each townhouse will have a portion of this market value in its costs so the profit for business purposes is only the gain made after the DA application started. When this profit is calculated you then go back and calculate the profit under capital gains tax using the Town house’s share of the original cost of the property plus holding costs up to DA and the demolition costs and of course the costs to build etc. If this gain is more than the profit calculated using the market value then this extra amount would qualify for the 50% CGT discount. There is some tax planning strategies here as to when you recognize the capital gain if you could instead argue that the units are trading stock so it would be worth doing the numbers with your accountant.
For GST Purposes:
At the date you committed the land to the unit development you committed the trust to an enterprise that will have a turnover in excess of $75,000 so it must be registered for GST. Providing the purchasers of the townhouses agree in writing you will be able to use the margin scheme. This means that the market value at the time you committed the land to the development will not be subject to GST. Apportion the market value amongst the town houses, claim GST back on all the costs from DA stage forward, then when you sell a town house only charge GST on the difference (margin) between the selling price and the market value when the trust first registered for GST.