Trusts, GST & CGT implications

Would appreciate some advice on the following re Trust, GST & CGT implications.

Purchased a block of land in trust name in November 2006 for the purpose of building a house on it and immediately selling it. Cost of land $1m

No GST was payable on the purchase of the land as the previous owners were'nt registered for GST.

We registered our trust for GST, but to date have not claimed input tax credits.

House has just been completed and is presently for sale.
Cost of building $600k. Presently for sale for $2.395m

Do we charge GST at the rate of one eleventh of the total sale price, or are there any different methods? Would it be beneficial to use the margin scheme?

Is there a formula for CGT?

Advice is greatly appreciated

BUNDY

 

Hi Bundy

As the Trust has been registered for GST then it obviously has an ABN. An ABN is issued generally where there is an enterprise (exception for companies). Therefore to some extent the Trusts path is already mapped out, there are just some issues/scenarios to consider for GST and CGT.

If the property was purchased with the intention of building a dwelling for sale then that looks like an enterprise (such as a property development business). As such the trust would be entitled to the GST input credits on construction and the dweliing would be classified as "new-residential" property and therefore be subject to GST on sale. You may choose to use the margin scheme in this instance. This would generate a GST liability on sale of $126,800 on a GST inclusive price of $2.395M {(2395-1000)/11}. Therefore the total net GST liabilty for construction and sale would be $72,300 (126,800 - 600,000/11). On the CGT side of things the profit would not be subject to CGT but ordinary income tax as it is ordinary (business) income rather than a capital gain.

If the property was purchased with the intention of building a dwelling and then retaining that dwelling to let, then that too will meet the enterprise rules for the issue of an ABN. However, under that intention, the enterprise provides input taxed supplies and is therefore not entitled to claim GST input tax credits on the construction. Nor would it be able to charge GST on the rental as its an input taxed supply. However, unless the property was let for 5 years, the sale of the property would still by definition be a "new residential" property and therefore subject to GST. Now the sale of the property under this intention (at any time) would be subject to CGT as it would create a capital gain rather than ordinary (business) income. Depending on time frame the 50% discount may be available in this instance.

Whatever you do, go and get some specific advice.

 

Thanks very much MattR,

The first scenario is exactly what I thought. The development is certainly an enterprise and we are happy to treat it as such as we hope to continue to do more developments. No CGT, taxed as ordinary income.

After numerous phone calls to my Accountant an me sending him exerts from the ATO, he is also in agreeance.........finally and is getting back to me tomorrow with all the details.

It's so hard to find a good accountant!

Will let everyone know the final outcome for future reference.

Cheers

BUNDY

 

I agree with Matt R on the position if you purchased with the intention of selling at a profit. Much more detail on my opinion is in my How Not To Be A Developer booklet available under free publications on bantacs.com.au But I disagree on the statements if you purchased it with the intention as a rental. Under those circumstances the sale of the property would not be part of a normal supply of your enterprise therefore it would not force you to register for GST so you would not be required to charge GST even though the property is under 5 years of age simply because you are not registered.

Julia
bantacs.com.au

 

Thankyou very much Julie,

Will have a read through your articles.

Cheers

BUNDY

 

Julia I still think it would be caught by GST. Bundy stated that the Trust was reg'd for GST and so it would be be subject to GST on sale.

If the trust was not reg'd for GST, and the intention was to rent, then I agree, no GST on sale.

Really it comes down to "enterprise" for GST.

By the way, I had a squizz at your article(s) on your web site. Lack of time to read much, but great addition to your site.

 

My understanding was that if it was a new development, even if it was intended to be rented out and even if it was actually rented out if you sell it before the 5 year mark you cop GST...