GST and CGT - Triplex development to sell

Hi all,

If I purchase a property with the sole intention of subdividing into a triplex site and selling all 3 properties as soon as they are finished can someone please let me know the GST and CGT implications?

Residential property purchase - $600k
Contruction Cost - $600k
Purchase, Subdivision and holding costs - $100k
Sell Price - $500k each property, total of $1.5m
Capital Gains - $200k

I understand this will have to be done as an enterprise as I meet the $75k requirement.

What GST would I pay on this? Is the GST calculated on gross of $1.5m so $150k?
Is the Capital Gain reduced after GST is paid ($200K minus $150k)? so Capital gain of $50k?
What GST Credit's would I receive?
Does the margin scheme come into effect essentially reducing the GST amount by removing the initial property purchase of $600k so new sell price total is $900k so $90k GST vs $150k?

Of course I don't fully understand tax but thought these questions with numbers and examples may be a good starting point for dicussion.

Apologies if I have this all completely incorrect.

Dave

 

I can't tell you the figure/dollar amount but I will weigh in on a couple of things

If you are intending to do this and sell as soon as possible then it's not a CGT type deal but a income tax (if in your personal name) or company tax (if in a trust/company). So the income is added to the annual income of the entity and worked out on that basis, not on a project basis if that makes sense? If it's personal income tax then you'll have an idea of what it is, if it's company tax then it's 30% (or is it now 28.5?)

GST you will hopefully be able to use the Margin Scheme. That will reduce it from $150k to something lower. Terry and others have written lots of informative posts on this and the ATO has some good guides.

 

No CGT - income tax
GST on the sale

 

Margin scheme critical and use when selling, and should be mentioned in the sales contract

ATO actually takes their money on sales. This is relatively new, when I was developing this was not in place

also have you included holding costs

 

CGT is not relevant. no discount. subject to revenue account. no discount for revenue account.

GST will apply. may be able to use the margin scheme depending on how you purchased it.

 

26% for 2021 financial year if a base rate entity.

 

Thanks all,

capital gains is added to my income, so if GST is paid does it reduce the capital gain thus reducing my total income (wages + capital gain)?

@MTR what do you mean by "also have you included holding costs", is this for GST Credit?

@Mike A what's a base rate entitiy?

If I can apply the margin scheme and I remove the cost of the property purchase $600, and get a GST credit for the construction $60k and subdivision costs $6k then I may be left with about $24k to pay in GST?

I'm getting this example from...

GST and the margin scheme

Example: Using the consideration method for property purchased on or after 1 July 2000

Bob is a GST registered builder. On 1 December 2002, Bob purchased a block of land for $150,000 from a vendor who was not registered for GST.

Bob paid $550 in conveyancing fees and $7,000 in stamp duty on the purchase of the land.

Bob later constructed a house on the land and sold the house and land for $315,000. Bob chose to use the margin scheme to work out the GST on the sale.

The margin for the sale of the house and land package is $165,000, for example, the sale price of the property minus the purchase price of the property ($315,000 − $150,000).

The GST Bob must pay on the margin for the sale is $15,000 ($165,000 × 1/11th).

Bob has a tax invoice for the conveyancing fees and can claim a GST credit of $50 ($550 × 1/11th) in the tax period to which the purchase applies.

Bob also holds tax invoices for $110,000 of business purchases he made when building the house. Bob is able to claim $10,000 in GST credits for these purchases.

Bob is not entitled to any GST credits on the stamp duty as GST is not included in the cost.

thanks
Dave

 

You missed the part about there being no capital gains/ Income will be taxed excluding gst

 

Please correct me if I've misunderstood.

Taxable Profit is after all expenses are taken care of including the GST owed after applying Margin Scheme.

So in the above Scenario, the profit is $200k before GST.

GST is approx: [$1500k - $600k (land) - $600k (build)] *1/11 = $30k

(GST is already paid on build, assumes $600k includes GST)

So taxable profit is $170k. At 30%, net Profit is $119k

 

This was my thinking.

 

Attached reading for background prior to seeking tax advice

Wrong. GST on costs will be creditable. So the costs ex-GST will be $545,454 perhaps.
GST using margin scheme may mean profit is also higher if the GST is less. Many costs wont include GST eg rates, interest, land tax, council levies etc

Important to ensure the project if correctly costed as a profit assumption could be wrong.

 

why don't you pay your adviser for advice ? i am amazed people do these things without seeking professional advice.

 

Of coure I'll be seeking proper guidance from my own accountant, however I thought you guys on this forum could shed light on this not just for my own benefit but for the benefit of others. Also I was looking for basic understanding before I speak to my accountant so him and I are talking the same language.

This is after all a place were we come to learn and share is it not?

 

for sharing simple stuff i believe so. for complex stuff there are just so many variables. it's like me learning how to construct a 4 storey building. i could try and learn it from a builder or let the builder who is experienced do it for me. outcomes will be totally different.

 

Thats why I propvided some light reading before you obtain advice. I beleive many budding developers make many mistakes
1. They dont seek and have a tax plan and
2. They dont then cost the project prior to commitment based on the tax plan.

 

So does it look more like this then if purchasing as a company and existing property doesn't have GST applied and selling new property with GST applied in selling contract?

Of course there are other factors and I would always recomend seeking professional advice like I will do.

Residential property purchase; $600
Contruction Cost; $550 + $55 GST
Subdivision; $63 + $7 GST
Purchase closing and holding costs; $35 (not sure if this includes GST)
Total project cost - $1,243 + $62 GST

Sell Price; $500 each property, total of $1,500
Selling Fees; $9 each property, total of $27+$3 GST

To work out GST if using Margin Scheme...
Total GST owed to ATO exc CREDITs or REDUCTIONS = $1500*10% = $150

Now lets reduce GST owed by removing the initial property purchase
Total gross sale value; $600-$1500=$900
Total GST owed to ATO exc CREDITs inc MARGIN = $900*10% = $90

Now lets reduce GST owed by removing the GST CREDIT
GST CREDIT; $65
Total GST owed to ATO inc CREDITs inc MARGIN = $900*10% = $90-$65 = $25

In regards to Income TAX would the $1,500 be used or $1,500-GST = $1,350 ?

thanks

 

no

 

I was actually able to question my accountant about the 6 year main residence rule which she didn't factor in to my tax calculations, she assumed I bought another house, which I did not, I was renting the whole time.

 

she doesn't specialise in property by the sounds of it. one of the questions on my checklist is was the property ever your main residence. that is a basic question any property accountant would be asking their clients. that sounds like telling your surgeon where to cut.

even if you had purchased another house she should have discussed with you whether it was worth using the 6 year main residence absence rule. sounds pretty poor to me.

what else did she miss you don't know about ?

 

There was 2 questions Mike, which did you answer no to?