GST and taxation on selling property

Hi, I was hoping to get a better understanding on a situation that I am in at present.

We purchased a property in July of 2017 (which is when it settled) under our individual names myself and my wife.

We then built a duplex on the property and subdivided it into two under a GST registered partnership in both of our names. During the building of the property we claimed the GST that we paid to the builder under partnership.

We then sold one of the units in August of 2019 and paid full GST on the purchase price as it was brand new. We have not done the taxes yet so I dont know how the capital gains will work on it.

We then rented the other unit since June of 2019 till now. There has been two tenants in it so far and it is currently under lease till August of this year. The property was not advertised to be sold as it was our intention to keep it as rental.

I then advised our current accountant roughly two months ago that we will be paying back the GST amounts that we had claimed during the build on this particular unit and although we have not done our partnership BAS since I have informed him of this, he is aware of it and there is an email to prove it.

The managing agent has approached us recently with an offer saying that he has shown a buyer through our property (it was not advertised to be sold) and he has an offer for us and is able to have it settled before the end of financial year.

I must mention this is not our main source of income, as we have not treated it as a business and it was more of a every few years sort of thing.

If we were to accept the offer and sell, would the following be correct:

Given this unit is no longer brand new, my understanding is that while we have to return the GSTs that we have collected during the build, we do not have to pay GST as a brand new property.

I also understand that we should be eligible for 50% capital gains tax discount given we are selling several years after the land that it sits on was first purchased and more than 12 months after it was built.

I would really appreciate it if people in the know could let me know, will ATO treat this as a business meaning we have to pay full GST on the selling and there is no capital gains discount or do we have an argument to make with them?

 

it sounds like it is still 'new residential property' as defined under the GST Act.

Unlikely you will be taxed on CGT and no 50% CGT discount either.

get some proper advice.

 

Thank you for the reply.

If it was being sold as "Going concern" given it is leased, will we still need to pay GST?

with regards to CGT,

If you buy a property, lets say renovate it, and then sell it few years later you will get 50% discounts on any capital gain.

However if you build anything on it, and then sell it, you wont get any discount?

The differentiator is that the ATO doesnt like it when people build but is ok if they renovate the property?

 

MORE THAN 50% of the GST credits were overclaimed. But are deferred up to 4 years and can offset GST ona subsequent sale. Which can use the margin scheme if eligible.
Seems like isolated profit making.

New residential premises isnt what you consider it is. New doesnt mean "new". It is defined by GST tax law. Typically after construction a property must be continually NLY rented (cant also be on market to sell) and then a full 5 years must pass. But the final amount subject to tax will be higher for the GST saved.

I dont consider CGT applies without property tax advice to the contrary. It is a profit arising from a isolated profit making enterprise. This has always been subject to ordinary income - And the modern advert of CGT in the 1980s doesnt change that.

 

Going concern is not a matter for a sale of residential premises. Where did you read that ? Resi premises that are not new resi premises are input taxed so GC cant ever be considered. The issue here is what seems new resi premises.

important any sale contract is darfted to consider the GST method as the margin scheme (if avilable) may save you some $$$

CGT v profit making are two different tax concepts. Why do people assume CGT when income tax existed before CGT ? Such sales were not tax free before CGT came into play.

Surely you had tax advice before commencing a $1m project and attempt to make profits? Sale is also subject to the buyer ascertaining the GST position as they are liable and must otherwise withhold.

All explained in our developer toolkit

 

Ok thank you, does the 5 years start from when you originally purchased the land or when the property's build was finished?

If capital gains tax doesn't apply here because it is viewed as "business" will we be able to keep the sales proceeds in a bank account and have it being taxed at business rate rather than it counting as full income in addition to our existing main source of income?

The situation is that we earn close to 200k or maybe just over that as combined income from our main business.

Then the proceeds of this sale, if 50% discount doesnt apply and count as income will push our overall income significantly higher.

So either if it is considered as a CGT event, then the 50% discount should apply to the profits and if it is considered as a "business" then we should be able to keep the sales proceeds and have them taxed at business rate rather than pumping it into our individual income.

Thats the grey area at present.

 

There is no business tax rate. You might be thinking of company taxation which can't apply as it is not held by a company

 

No grey area. There are three ways property sales are taxed

1. As a CGT asset (held 12mths + = a discount)
2. Ordinary income (eg busienss ). I suspect not as this is solated and a one off.
3. Ordinary concepts as ordianry income.

The taxpayer intentions when the enterprise is commenced are a key consideration. Its problematic to argue GST applies and also CGT. You cant have a enterprise and also not have one.

 

Thank you, well if I was to pick one I would pick CGT discount and pay the GST in full but by the looks of it I am liable for both.


The issue is that if ATO views this as business activity and therefore doesnt allow CGT discount, then really I should be able to withhold the money and either have it taxed a different rate or drip feed it into our income over few years rather than all of a sudden having to pay taxes on a 500k + income which is not our usual annual income.

It just looks like ATO closes all the discounts as they view it as business activity and yet wont allow any benefits associated with business activity tbh.

 

The other issue is that if I had held the property as it was, I would earn 50% discount on selling it, but the fact that we have built a property on it, effectively has nullified all the taxation benefits of the original land.

 

That is not how it works. If you had a company, or a trust, that owned the property then it could have been worked out that way.

Did you seek legal advice on structure before purchasing>

 

I don't understand this. what do you mean?

 

The ATO administer tax based on the law. they don't make the rules (sometimes they interpret the law in a different way though).

 

Jeez it really sounds like you picked a dud structure for what you intended to do with your project.

I'm guessing you didn't get advice on that and the tax treatment beforehand?

Did you using the margin scheme when selling? (Or look into it at least)

 

I did but obviously it wasnt the full advise in terms of what to do, they just said in order to be able to claim part of GST just do a partnership and register it for GST.

In hindsight if it was under company it would have been best as I would also avoid paying landtax on it.

Is there any kind of benefit associated with my current circumstance or I just have to accept the additional annual income and pay full GST and taxes on this property?

 

Perhaps. I always want to consider the tax implications for any development. Building to construct long term hold wont trigger GST OR full tax. I know many who acquired rentals and years later demo them and build new dwellings and keep them. CGT applies.

The true failing in the plan is a intention to sell...Thats called profit taking.
And failure to plan the project and ownership and how profits may be distributed.

This a pretty standard view based on common law after decades of tax cases have been heard by all levels of courts. This one is similar to yours with the added bonus of someone thinking living in it changes the CGT outcome. (I doesnt - read TD 92/135)
https://www.ato.gov.au/law/view/view.htm?docid=EV/1051420444189&PiT=99991231235958

 

1. Seek property savvy personal tax advice. It will check the facts are as they seem.
2. Consider the margin scheme prior to issue of a sale contract.

 

Ok thank you,

The lesson seems to be, if you want to renovate and sell an existing property, it might be best to purchase it in individual names as if we sell it after 12 months of holding it, 50% of profits is tax free basically.

However if we are intending to build, then best to purchase under company as it gets a separate threshold for landtax purposes and you could keep the money in company and drip feed the income or pay the income to the directors in the form of dividends or franked credit I think is what they would call it? But question is will banks assess the directors of the company when they want to lend or the company itself. How easy is it to borrow when the land is in company name rather than individual.

What would be the advantage of having a trust? Is it a good idea to connect the trust to the company or will it be on it's own?

 

Would you mind explaining the margin scheme and how it works in this scenario? I would really appreciate that

 

The lesson seems to be, if you want to renovate and sell an existing property, it might be best to purchase it in individual names as if we sell it after 12 months of holding it, 50% of profits is tax free basically. 100% wrong.

Not at all. You didnt read above posts. Or the developer toolkit. So explaining the margin scheme may be time wasted.
Structing varies for a large range of reasons. Like land tax in NSW for trusts as a costly strategy.