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GST implications on a build and sell

Discussion in 'Accounting, Tax & Legal' started by DavidJ, 9th Dec, 2007.

  1. DavidJ

    DavidJ Member

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    I was wondering if anyone knew if there were any GST implications when you buy a block of land, build a house and then immediately sell it. We have been thinking of doing this but was told the GST could be an issue. Is this true? If it is would it make any difference if we lived in the property for a few months prior to selling? This is the first time weve looked at this sort of thing bit would like to do a couple a year but if I have to pay 10% GST it just wouldnt stack up.
     
  2. coopranos

    coopranos Well-Known Member

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    If by "could be an issue" you mean that you would be required to pay GST, then yes, it definitely IS an issue.

    This is an abuse of the main residence exemption, and I would think that if the ATO ever looked at it they would deny the exemption plus hit you with penalties & interest. Remeber the ATO arent stupid - just because you live in a house for 2 months doesnt mean they cant easily see exactly what your intentions are.
    That is not to say a huge number of people dont wrought the system doing this every year, and I honestly dont know why the ATO havent cracked down on it harder.
    Losing 10% + copping full tax definitely makes it a less attractive option.
    If you rent the property out for 6 years then it is considered that you built it to rent it out and not profit from it's sale, and you wont cop GST on it.
    Personally I think a better option would be to build, rip out the new equity through a LOC after its built and use this to fund the shortfall for 6 years.
    That way you dont pay GST, get your CGT discount, get negative gearing benefits for 6 years, and also get any capital growth on sale. All without affecting your cashflow.
     
  3. DaveA

    DaveA Well-Known Member

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    look at the 5 year rule for gst...

    regardless if the sale is the first for the property within 5 years of being built then you will have to pay gst regardless of who lived in it....

    developers make money out of it (and pay gst) so its still possible. Just imagine your margin if you dont have to pay the gst...
     
  4. remorseless

    remorseless Member

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    DaveA,

    That wasn't my understanding of the GST ruling (GSTR 2003/03)? It seems to say that (1) It only qualifies as new residential premises if it has not been previously sold, and (2) If you're not registered (and not required to be registered) for GST, "then no supply will attract GST".

    Have I missed something?

    Cheers,
    Mick
     
  5. DaveA

    DaveA Well-Known Member

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    Maybe ive missed something but from far as i know thats what i understand.

    You may be thinking of (and i havent looked at the tax rulling which is your source) that it may be taking the opinion of its not assessable income if your intention was for a rental property. Ie if you plan to build then sell then its income and no cgt exemption. If your intention is for a rental property and things change then you should still be able to get cgt exemption....

    PS: its great for you to supply something to back you ur opinion, alot better than just coming in with nothing (a bit like me)
     
  6. coopranos

    coopranos Well-Known Member

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    I thought it depended on whether the margin scheme was used on the original sale...?
    Anyway, doesnt really matter for the purpose of this thread anyway i think
     
  7. remorseless

    remorseless Member

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    Some references

    A couple of helpful articles I found on this:

    GST Ruling 2003/3 - sale of new residential premises
    AAR: Publication: GST and Property

    The second one has some specific examples that explain why the sale of a one-off doesn't qualify as turnover and therefore you don't need to register for GST.

    The reason I looked this up is I'm in the middle of building a new place and you guys nearly gave me a heart attack :eek:

    Cheers,

    Mick
     
  8. coopranos

    coopranos Well-Known Member

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    Mick
    Dont get too comfortable yet!!
    As far as I know if you build a new residence and then sell it within 4 or 5 years or something (cant remember exactly) you are liable for GST.
    I will see if I can hunt down some references for you.
    Cheers
     
  9. DaveA

    DaveA Well-Known Member

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    if your building a place and IF YOU have to pay GST you make a loss...your building on a way to fine margin....

    i think ull find the business norm is 15% profit after all expenses (including gst) but not income tax

    But if you can buy and hold, you should have an increase of 22-23% equity.

    These are only general figures....
     
  10. taxstar

    taxstar Active Member

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    With regard to the GST question - I think the first thing you have to look at is if you have to be registered for GST.

    If you have to be registered for GST, i.e. in the business of property development, then your have to charge GST of the sale of the residntial property for the first time.

    If you do not have to be registered for GST, then you do not have to charge GST on the property, even if it is the first sale of residential property.

    Check with your tax agent on whether you have to be registered for GST and then go from there.

    Hope this helps.
     
  11. DavidJ

    DavidJ Member

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    Thanks for all the help on this. Holding it as a rental for a few years definately looks like the best option for me.