Calculating GST on Development

Hi guys,

Have spent the last few days figuring out best structure for new property developments - after meeting my Accountant today, it seems that a company will be used. I'm now trying to figure out how GST works.

Are the below calcs correct?
Assuming:
Land Price - $300k (purchased from private owner who has owned it forever, no GST applicable)
Build/Subdivision Cost - $400k + GST
Sale Price of End Product - $1,100,000

GST owing - $100,000
GST credits - $40,000
Therefore, you would need to pay $60,000 in GST

Profit = $360k
less $60k GST
= $300k

Are these calcs correct?

Also, does anyone know the formula for Excel to calculate GST payable under the margin scheme? I can't seem to get it right!!

Thanks

 

Hope you got some legal advice too

 

Yes I did. Structure for Developments will be:

Company 1 owns the land. Company 2 contracts to Company 1 to develop the land.

Companies owned by Disc Trusts.

For passive properties, they will be held in Disc trust with corporate trustee, and bucket company will be set up as a beneficiary as I have no one to distribute to at the moment at less than 30%.

I know there are further steps that could be taken for asset protection but I also like to keep things as simple as possible.

 

GST for developments should have been explained by the tax adviser. What did they discuss ?? There may be options such as the margin scheme which will save you GST. Then the impact of withholding needs to be understood too. And contractor payments reporting.

Record keeping will be the thing that most get wrong. It can be made quite simple OR very complex and therefore costly. Most small devs fail to maintain diligent records and will overpay tax and GST as a consequence.

Your calcs are certainly not correct. You are planning to overpay GST by $28K and have got the profit wrong. And that assume you WILL sell all you build. If you are keeping any it will affect the numbers since GST on the % of the build cant be claimed. Maybe.

Our developer toolkit explains more

Q - What's a passive property if GST is involved ?

 

@Paul@PFI is correct. if you can apply the margin scheme to the entire sale you will be $28k better off. maybe give him a call. no harm.

 

Lots of things look wrong to me.

Why is GST $100k ? This assumes you cant or dont apply the margin scheme.

Profit of 360k ? Lets assume full taxable supply and gst payable. Thats $1m excluding gst. Land dev costs excluding gst is 700k. That works out to be 300k. Dont know why you are adding back 60k gst.

If you dont get your initial calcs right the entire development could be doomed

Have you factored in holding costs such as rates, land tax and particularly interest ?

What if the development doesnt sell for 6 months ? Have you factored in how interest holding costs will impact on your ROI ?

Anyway get the calcs right first as you cant plan when initial assumptions are wrong.

Sounds like you are a newbie to the development game which is fine but doesnt your accountant offer these services to help determine potential project profitability. My developer clients do this before they even negotiate the price on purchase.

 

And a failure to plan ....is a plan to fail

 

But i dont want to pay for that

 

Yep ..But the concern I hear is that a large number of people commit to a costly project involving $1.5M++++ or even $3M+ that has uncertain outcomes. If it doesnt make a profit - Why do it ? Sure it may be complex but paying a town planner may even pay for itself. I have suggested that and found the profit jumps with changes to the design and support for pushing council. Or a plan to just get the DA and sell.

Its really easy to lose money making money. And only after signing a contract they then seek advice on structure still blindly believing a profit always occurs when developing. Then after commencing they learn about the endless process of fees, construction costs galore, permits and connections, civils and charges for an endless array of things. Holding costs blow out. Build costs blow out and the numbers themselves blow out.

The ATO seem to be watching the issue a bit harder and asking more questions about devs with tax credit refunds.

 

Couldnt agree more. And then throw into the mix a local australian resident who does a development in cambodia and sets up a structure over there. Cfc issues ? Attribution issues ?

Bribes to local officials ? Deductible ?

Travel costs ? Deductible or not.

Some even go so far to ask about setting up a buddhist charitable foundation hoping it will be tax free.

 

Thanks Mike. I've done a couple developments in my personal name but GST hasn't applied to those so GST and the company structure is new to me.

This was a hypothetical example, and I won't be taking on a new project for 6-12 months which is why my Accountant didn't run through it in detail. Just trying to get my head around GST myself at the moment. Yes I'm new to it, which is why I'm asking for help..

I have a feasibility study which I use when assessing a site, which takes into account all holding costs, purchase costs etc but trying to figure out how to calculate the impact of GST on profitability.

Thanks Paul for your Developer toolkit, I'll have a good read of it in the next few days.

 

Why didnt the developments in your personal name have GST ?

 

This is a concern.
A company doesn't change things

 

Basically GST affects cashflow. Determine which costs have GST include and thats what you pay. Then for calculating tax matters exclude the GST. Its likely to be refundable and of course GST applies when you sell.

eg Buy a site for $1m - No GST
Build and selling costs of $2.2m (GST incl of $218180)
Other costs wthout GST $262,000 (nil GST) eg interest, council, duty etc

Sell three units for $3m (GST under margin scheme is $181,818)

Profit is $2,818,182 sales less costs of $2,243,820 = $574,362

Lets assume tax is 27.5%. Co tax is $157,949

Now lets look at cashflow.

Total sale is $3m less GST net 36,362 less costs $2,243,820 less tax $157,949 = $561,869

That a likely yes for any developer. Assuming costs reflect reality and suitable contingency is built in.


Now back to the company. Then you just want to walk away and spend the $500K on a new house for the wife. The tax on the dividend could be the deal breaker.

Reasons a company can be good include:
- Ltax threshold
- Ownership separation
- Liability risks

Reasons a company may be bad
- Owner builder will want to wind up the company ?? Bad news for dividends
- Losses quarantined
- Uplift tax on how company profits are used. If reinvested into project 2 its not a concern. Remember, company profits are not shareholder funds without a tax issue
-ALP dividend policies for those approaching retirement

 

might also want to live in the property in the future - or a family member.

 

Not if there is Head Co and the profits are flushed out to Head Co. Can then consider liquidating Sub Co afterwards (with caution). If shares are held by a trust or an individual then could consider a 122A rollover from that entity to a new Head Co.

have to consider dividend stripping arrangements but here is a Private Binding Ruling I applied for and Dividend Stripping did not apply nor did Part IVA

Legal Database

if doing a development and the plan is to undertake more of them should originally consider Sub Co shares held 100% by Head Co and then don't even to look at any rollovers. Forward planning.

Funds in Head Co can then be lent to the husband and wife for the new house with a complying loan agreement in place. Even consider a mortgage over the property making it a 25 year loan. tax savings would be significant. Even under the proposed changes it will be a 10 year loan. Again significant tax savings. No idea why an adviser would recommend taking out a $500k dividend in one year. That sounds like poor tax planning to me.

 

Thanks for the example Paul - my brain is too fried right now but will get my head around GST properly in the next few days. Re the reasons against a company, these have been thought about (I think):

1) I assume if Company 1 subcontracts to Company 2 to do the development, and someone sues Company 1 it can be shut down and it wouldn't own the property.

2) This fund will only be for development purposes so no losses. Given Trust #1 owns the company, profits will go to the trust (which has my passive properties in it which are negatively geared after depreciation so this will utilise those losses).

3) Funds will keep rolling into new developments. A bucket company may get set up. If the Mrs has a baby and decides not to work, we might pay some dividends. If we need to buy a PPOR and say we're $50k short for 3 months, I'm guessing I would loan $50k to me from the company and then pay it back 3 months later.

4) Not sure what the ALP dividend policies are but I'm a long way from retirement

Thanks for your help

 

1. Best not to assume but to get advice. I think think of instances where it will effect the company holding the land. If company 1 doesn't hold the land who does?

2. What will happen if the tenants from one of your passive properties has an accident and sues the trust which owns the shares in the company which owns the land?

3. this could work but who would own the shares in the bucket company?

4. this could effect your strategy, but things are vague atm.

 

1. Company 2 owns the land, Terry. And Company 1 just contracts to C2 to develop the land. ie C1 does the risky stuff, C2 just owns the land.
2. Hmm good point...

 

1. that could be good but it doesn't mean that the land cannot be at risk.