Hello, I am at DA stage for my first triplex development in Duncraig Perth WA. Developing under a trust structure. Wondering if anyone has experience in retaining and renting their development after building and the associated GST and tax complexities of doing that? I have acountant advice, but looking for real world stories. Thank you.
We built four townhouses to rent out and hold long term (minimum five years) for an income stream. My understanding was that we avoided either holding or paying (GST) and claiming back GST. I don't understand it really, but someone will jump in and explain it. Do you not understand your accountant? I didn't understand it, but had people overseeing our development who did understand it.
For new dwellings if sold within 5 years of practical completion - GST applies - either full or margin scheme GST. New dwelling is deemed as taxable supply. After 5 years, no GST is applicable. Within 5 years, if you rent out and then sale, rental is added to your entity's income. However, best person to talk to about this is your accounant. If i were you, i will ask him to give me modeling for each scenario.
If you are going to rent them out then make sure you don't claim the GST on the construction costs during construction as you aren't eligible and will need to pay it back. If you end up changing your mind and want to sell before they are 5yrs old then you will need to sort the GST out and you may be able to back claim the GST during construction to offset the GST you will need to pay by selling "new residential premises"
And don't forget beautiful depreciation. Non cash tax write off. Although it does affect your CGT cost base when you sell.
Great advice all round, thanks for your responses. It would be good to know what works best for most developers, retaining and renting for min 5 years to treat as Capital account or selling straight after the development, treating as income, and going again. I guess it changes dependant on the person and situation. Thanks again.
assuming you can do it profitably, the answer is almost always to sell it and do it again. Developing and renting and holding for 5 years is just the old “if I earn more money I’ll need to pay more tax” attitude but with more steps. GST is a non event, it takes 10% of your profit, big deal, renting often doesn’t cover the real depreciation, CGT concession can be sweet but it’s invariably on a much lower profit amount. This is all before you consider opportunity cost of your capital (and the locked up profit and lending power)
Thanks hearts, i had landed on the same and am going down the path of finishes best for sale. Great to hear this works best for some others on here also.
Renting out for 5+ years doesn't magically make them capital account. It just sorts out the GST issue. It is very much dependant on your strategy and it's not necessarily a one size fits all. Things to consider: - what is the intent that has been noted and provided to your accountant - what might change in the future - what if the market surges and you decide to sell one to reduce debt but keep the other 2 - how much equity could you release at the end of the project vs profit after tax - is the equity enough to do another project AND keep the asset rather than sell to get the money to do another project
GST is not 10% of your profit. Be very careful here. That is a common misconception. Very simplified examples below. eg 1. Dev costs all in (land/build 50/50) = $1m. Sale price= $1.3m (very profitable development at 30% margin). GST claimable = $500k/11 = $45k. GST payable = $1.3m/11 = $118k. Net GST = $73k. Which is 24% of your profits. Then you pay income tax on remaining profit. eg 2. Dev costs all in (land/build 50/50) = $1m. Sale price= $1.15m (15% margin). GST claimable = $500k/11 = $45k. GST payable = $1.15m/11 = $105k. Net GST = $60k. Which is 52% of your profits. Then you pay income tax on remaining profit. I hope you get the drift of what I am saying. I develop to hold because of CGT halving my taxable profits, depreciation reducing taxable income from rent, receiving rent and CG that every five years you hold add 50% to your margin (approx). You can reborrow your manufactured equity and go again if the numbers stack up. No method is wrong. It depends on your goals and what works for you.
Yes agree. You would use margin scheme. I was simplifying. It was mentioned GST is only 10% of your profit. My point was that GST is payable regardless of profit and if you don't make enough GST can easily turn it into into a loss making project.
It depends on the market timing and also profits you will or won't make. Until recently there was very little or no profit in small lot developing in Perth.
your calc doesn't allow for any of the creditable gst on all the expenses relating to the development? the gst payable would be much less then what you stated?
Brumbie has no idea what the margin scheme is or how it works. He totally neglected to include the 50k of GST credits you would get in each of his example. Assuming you use it (you would be crazy not to). The GST amount is very close to 10% of your profit.
I know it’s not exact, but on my feaso’s I generally just apply a 12% figure of the profit as a guestimate. Can’t expense interest, some planning costs (council levies, etc) and stamp duty - hence a bit higher then the 10% rate.
What if you made little or no profit? You are suggesting little/no GST payable? I do know what the margin scheme is and I use it. It was probably badly worded on my part but what I was trying to show was that GST is not a % of your profits and it is dangerous to be guesstimated this way. The lower the profit margin the higher the % GST is on the project because it's based on sell price not profit. Like I said in this post which you ignored?
You can lose money and still pay signiifcant GST under the margin scheme. The margin scheme only includes the sale prices less the base cost of the land. Divided by 11. So construct costs arent a factor at that point. However the GST on the construct etc can be creditable in whole or part. Its not uncommon that GST reflects a few percentage points of the total sale value. But can be between 5% and 100% of profits....Or even worse still be payable on a loss. Tip - GST is NOT 10% of profit. This indicates serious errors in calculations prior to even consiering a develOpment. Its aburd to believe people will commit to a multi million dollar investment choice and not know their budget and numbers incl GST and tax outlays. But we see it regularly. Often with losses. Many people think developing is inevitable profit when that really not the case. Often the ATO gets a much larger share of the sale than the developer. The ATO can receive tens of thousands in GST and yet the developer loses money. The ATO also retains a first right to its share since when a property is sold the BUYER must withhold and remit the GST first.
