GST and Vacant Land - Igor Gets it Wrong

Igor owns a vacant block of land located in the Mornington Peninsula. The land was purchased in 2009 as an investment property.

As Igor considered this to be an investment asset he didn't pay GST on the sale. Igor ends up with a massive GST liability.

Igor is considering the development of the property by constructing residential premises.

Igor has not done any property developments in the past and the majority of his assets are passive investments.

He plans to sell the units when completed as he is expected to make a decent return on that investment

In this case an isolated transaction such as this, even though it is not the normal activity of Igor, would be considered to be an ‘adventure in the nature of trade’ as the development and eventual sale of the residential premises is of a commercial character.

Don't be like Igor. Consider whether GST applies to the sale of your property

 

A tax savvy adviser will probably suggest to Igor that a sale of the property with merely a DA and zero other site works and a tenanted property could still be a sale of a CGT asset AND also avoid GST. Sure there may be less profit, but less risks too and the tax savings could be attractive.

A few things Igor should not do. Make the property vacant, fence the site or demo it. Sale of vacant land or its equivalent can be fatal too.

 

Hi @Mike A, and @Paul@PFI
Thanks for your educational posts!

I'm a bit likee Igor- I bought an IP, rented out the house but subdivided off the back yard and sold off the vacant land for a profit. I didn't have an ABN, and didn't pay any GST (this was back in 2016, and on my accountants advice to just do it in myown name). Your posts now have me worried... so what is the time frame the ATO might look back at prior sales and chase the GST payment up?... is it indefinite....is it 7 years?

 

There is no time limit as such as not paying the correct amount of tax generally falls under "evasion and avoidance" even if the matter was a mistake. A GST audit is usually limited to 4 years but GST affects income tax. Only the question of culpability determines the consequences arising from any penalty and interest. I question how it got past a solicitor preparing a sale contract. They may have relied on the flawed & negligent advice of the tax adviser who may have some liability for any penalties but not the primary tax. This could also give you some "safe harbour" protection from penalties if you relied on flawed tax advice. That said, the sale contract possibly failed to use the margin scheme so 1/11th of the proceeds of the block sold could be a liability rather than a lesser amount. Any GST imposed would affcect and REDUCE tax paid on profit. I also question whether the land sale was calculated with a CGT profit or it was "ordinaryrevenue" not subject to a discount. The sale may still be a CGT asset and further advice is likely needed adout the intentions and issues surrounding the acquisition of the land at its original point. eg If Michelle buys a house and land and her initial intention is to reno the old one and sell the land off then its likley a fully taxable profit and not a CGT event.

The ATO can easily access council DA and land sale records and match data and often do this up to 3 years after a sale. They then send a questionaire asking about the enterprise being conducted and what occurred etc. The activity of subdivision with intention to sell would likely be considered a enterprise consistent with tax ruling MT 2006/1. Hence GST applies to a taxable supply. Vacant land is hard to transfer without a enterpise but if you sold to your parents etc that could fall outside the view of an enterprise.

 

Could have ignorant Igor included the margin scheme in the sale of contract "just in case" which might have helped here?

 

Thanks heaps for your explanation. The subdivided off vacant land sale and renovated front house sale we did pay capital gains tax on, so definitely no 'margin scheme' applied. I don't recall my conveyancer asking any questions about the sales contracts or about the way they were filled out- I suppose he figured we knew what we were doing (obviously not!).

 

You are confusing two issues. margin scheme is a GST process to reduce GST. If you ignored GST then you cant now choose to use the better method if the ATO notes it.
The sale as a CGT event may or may not be correct.
eg If you acquire the lot with intention to subdivide and sell off the rear lot then that section of land is not a CGT asset. It is a revenue asset used to produce profit. The intentions at time of purchase or soon after may be the determining factors. If you bought the land and several years later realised council allows subdiv thats very different to a intention to develop and produce profit and why you bought the lot. Many people dont have the experience of tax laws that stood back before CGT was introduced in 1985 and just assume if you sell land then CGT is involved. Very wrong. And I find many younger advisers make this same poor assumption.

This is why you should not use conveyancers. They asked you questions about GST and tax and you either gave them the wrong answer or the tax advisers gave you the wrong answer. A convenyancer should never assume a thing about tax. Even a solicitor who may understand and be qualified to advise on tax law cant give tax advice on how the contract is to be completed concerning GST as this is based on determining a tax liability. A tax agent service. I find solicictors are more likley to get it right and ensure that the client gets it right. I often get clients solicitors on the phone questioning GST issues when they draft contracts. I cant say a conveyancer has ever done that.