Hi all, I'm considering trying my hand at a 3 to 6 townhouse development in Brisbane. Have not developed before but have a couple of contacts on the construction and project management side. From a strategy perspective, I'm trying to determine the pros and cos of building and holding vs building and selling. Some immediate issues that I'm pondering are: 1. I am not registered for GST and it seems usual that a development constitutes a commercial enterprise triggering GST on the sales. Is there a way to keep it residential, ie holding the properties for 5 years and selling sequentially after that time? 2. If it is more properly characterised as a commercial enterprise, does that mean I would have to seek commercial financing rather than resi? 3. Are there differences between acquiring vacant land vs an established residential dwelling in the assessment of commercial nature of the deal? The following tax ruling discusses this, but to be honest I'm not clear whether it is applicable. GSTR 2012/5 - Goods and services tax: residential premises (As at 19 December 2012) I'm still mulling this all over, would love to hear thoughts/experiences. Ally
Not all projects are 'commercial' but all new projects attract gst (sales of new residential property is gst inclusive). The size of the project is one determining factor only whether it's commercial eg: 5 villas costing $1.5m to build would most likely attract commercial rates but a $2m duplex build wouldn't.
See replies above + I have attached the developer toolkit which helps explain some concepts. DIY tax solutions in this complex area are not a great idea.
Thanks Scott, interesting....this may be a silly question, but who determines the commercial nature of the project? I'm presuming this would have to be sorted out at the financing stage. From a servicing perspective I'm thinking there might be advantages to commercial lending..although not very familiar with the ins and outs of this.
Thanks very much Paul, clarifies those matters! I just downloaded the toolkit...as you suggest these seem like murky waters it would be prudent not to enter alone. At least not yet! I think this could be an instance in which looking for tricky DIY workarounds is of dubious value.
Its all about education.... Sometimes people seek to avoid tax but they dont know what value the tax is they are avoiding. ie the 5 year rule. Its often far more assurred and better profit to sell and reinvest or bank it. GSTisnt the bogieman its made out to be. If you think of GST applying to profit its far less onerous. BUT that isnt always the case. One of the worst mistakes i see too often is a person who buys land from a developer. Margin scheme fails and profit can be halved esp if they try the 5 year thing thinking it saves tax !!
Funny answer but the owner sort of....Their project falls in the lender rules. Thats where a good broker helps. Commercial loans almost expect a project hitory AND fees and charges are hefty and LVRs and the like are quite a bit lower.Its a business loan that is drawn after YOU spend your cash
Yes. Providing the holding as residential properties is not a scheme with a dominant purpose of avoiding GST, s.165 GSTA
....and a number of other limitations evident in a recent case (FKYL v Commr) a developer lost....The 5 years rule has a catch. It requires NO OTHER use within the 5 year period. So you cant have them up for sale then rent then for 4.5 years and then offer them for sale while tenanted. 5 years of continuous rental isnt same as 5 calendar years....See pars 40+ where it discussed gaps in the developers story. Like the "rent to buy" issue
