Developer tax question - real life scenario

I've never developed before but am considring. Can I get advice on the scenario below.

Bought and old knockdown in 2013 for 1m on Gold Coast.

Plan to build 3 units, each to be sold/owned seperately total costs 1m. (So outlay in total 2m).

Expect to sell each for 1.5m (maybe more but let's say 1.5m as I always go conservative. In real life I'm actually expecting each to sell for 1.7-1.8)..

So outlay 2m and let's assume net profit is 1.5m. What tax/capital gains do I pay. And any minimisation strategies? Eg am I better off holding and renting? Could I gift some or all units to family members? Etc.

Thanks guys!

 

This is something I would strongly encourage you to get proper professional advice.

At worst, with a sale price of $4.5 million (3x1.5 million), you could be up for nearly $410,000 GST. For that reason alone, it is worth getting proper advice.

For what it's worth, as far as I know, you would not pay CGT, you would pay ordinary income tax on the profits of the sales. You may be able to develop in an entity where you claim the GST costs on the build and then may be able to use the margin scheme when selling?

Alternately, if you build to hold and rent, you would not claim the GST on the build but if you hold for 5 years and then sell, you won't have to pay GST, saving nearly $410,000. With the Commonwealth Games in 2018, this could be a good option. Pick up some capital growth and save nearly half a mill on GST.

I am not a tax professional, this is just an opinion based on what I have read here and there, so please get professional advice. I am sure @Terry_w and @Paul@PFI will back me up on that point.

 

You have left it a bit late if you already own the asset. But better late than never.

I suggest you pay a few thousand dollars and get some good legal and tax advice.

 

Thanks for this.

PS - do you mean CGT or GST?

 

Goods and Services Tax (GST). My brother in law built 4 townhouses in Burleigh. When he sold them he had to pay $300k GST to the Government. This was a combination of not getting advice before starting, changing his mind 2 years after building and not having a good accountant. $300k! Brutal!

 

Wow. Ok thanks for the advice. I've done lots of buying and selling but never developed. Got a block at mermaid with an older knockdown on it. Will be able to sell for a profit of course but think I might take a shot at building a duplex on it.

 

No worries. Just go get advice before you start please! Dropping a few k on good advice is much better than paying hundreds of thousands more tax than you need to. Think of it as low risk, high reward!

 

If you hold it for a period after building do you avoid the gst?

 

Thanks man. Will do.

 

GST applies to new residential property sold for the first time if you are an 'enterprise' and registered or required to be registered for GST. New is defined as property built in the last 5 years.

 

Thanks. So let's say I'm a sole trader owning the property personally, and not held in a corporate entity. I'm likely exempt from gay correct?

 

I would say if you are developing 4 townhouses to sell at a profit then GST will apply (if you sell them within 5 years of construction).

 

You mean you own the property in your own name? No trading going on possibly.

You may be exempt from 'gay', but it would depend on where you hang out and what clothes you wear.

If you mean GST - then if you are not conducting an development then perhaps you could be GST exempt. But it sounds like you possibly will be going from capital account to revenue account and may be conducting an enterprise and therefore GST would apply.

 

Thanks. lol at the gay bit damn auto type.

Yes my scenario would simply be that I own the land in my own name. Knock down the house. Build a duplex. Then have options of either keep and rent. Or sell.

Sounds like some are saying that I should keep for 5 years before selling.

 

@Terry_w



Do $1 trusts come with a $2 company?

 

All the tax concerns are explained in my developer toolkit

The margin scheme may substantially reduce GST and enhance profit. CGT wont be a factor - Income tax will.

 

LOL....Does one apply for that concession ?

 

If the market and construction values are accurate, youre likely to make significantly less than the 1.5m, dont forget not just gst but seling and marketiny fees, contingencies (make.sure this is at least 10% if your first development), planning/design/consultant costs, demolition of existint property and site costs etc.

The reason i say this is because Its important to.get the true figure nefore deciding whether or not to go ahead wirh the development . in some cases it can often be simpler and easier to sell a site thats been held for a while, (depending on what the intent was when site was bought), crystallise the gains now and take.the 50%cgt than.to.go.through the whole process, take on.much higher risk, spend lots of.cash and time and then be taxed significantly more.

 

I.dont recall anyone saying you should do.that, it was only stated re gst rules , doesnt mean its a good idea to go down that path.

 

The idea that you can keep a property for 5 years then sell without paying GST is correct BUT its a very invalid conclusion. It may not really save that much in the long run. During the five years 100% of the change in value is taxed as its not a capital gain, the GST on costs cant be claimed and the property will be "used" and no longer be as easy to sell.