GST on House Construction

Hi team,

One of our companies is about to purchase and allotment and “owner build” a house on the property. The entity is registered for GST. We are using cash to buy and build with no loans being sought.

The residential land is being purchased from a developer for $200k. There is nothing in the contract about GST.

What is the effect here with GST?

Moving on. We will build the house, cost is $330k inc GST.

So presumably I can claim the $30k GST back.

When I sell at $650k, my understanding then I charge:

Sale price, less the land cost (650-200) = $450k inc GST (40,909 in GST).

So $30k gst refunded during construction and $41k gst paid at settlement. Is this correct?

Or, because it will essentially be “trading stock” on the books, do you not claim the gst during construction and sort it out at the end?

 

Wow this sounds like a potential nightmare. I'm almost afraid to ask, but why would your company purchase and build a residential house for?

 

To flip and make a profit on. Our company works in and around the construction space so can get very good pricing. We also have a full time project manager coming on board to help us.

 

Update, developer has advised the land is sold under margin scheme.

So gst is 1/11th of the sale price less land.

So the figures above should be correct.

I would assume that company tax (as this is income opposed to capital gain) would apply on the ex GST amount?

 

Sounds like you are mixing things up. "i can claim GST" - you said the company was buying it.
No loan - how is the company getting the money to buy it?

You won't be able to claim GST if purchasing under the margin scheme.

 

I don’t think I am...

Construction costs will attract $30k gst, which can be claimed back.

Margin scheme on the land, so in effect, no gst.

Sale price less the land cost will attract 1/11th GST, less the $30k refund.

So I effect, it’s 1/11th GST on the “cost of construction plus profit), less the GST refundable on the “cost of construction”. Which boils down to 1/11th of the profit.

Is that correct.

Funds are coming from our bank account, we are paying cash.

 

You cannot claim anything. The company might be able to though.

 

Sorry, by me, I mean the company.

Is my breakdown above correct?

 

I am not willing to verify numbers, but the company would generally claim GST on the costs and pay GST on the sale.

 

Is this reasoning (from reading the ATO’s website) correct?

So in effect, it’s 1/11th GST on the “cost of construction plus profit), less the GST refundable on the “cost of construction”. Which boils down to 1/11th of the profit.

 

basically. Not sure if it works out to be 1/11th of the profit though. This part doesn't sound correct.

 

I’m going to spreadsheet it tomorrow and check the math on that last bit. Will report my findings.

Thanks for the clarity.

I’ve asked my accountant and lawyer to work on a way of having one company lend money to the other company and charge an interest rate or fee of sorts.

We have an entity with some losses that I want to burn up.

 

It would usually work out to be 4 to 6% of the value is lost on GST.

 

Many people mistakenly beleive a company makes a activity a busienss and allows GST treatmnet to vary. That is factually incorrect. A company is mereley a different type of tax (and legal) entity v's a trust. The activity type remains.


1. A activity to construct and sell is a revenue activity. Not a CGT event - which wont impact a company anyway. You seem to understand that. It may not actually be trading stock and could be an isolated profit making and either way the same tax issues occur EXCEPT for the timing of when the sale is recognised. Depending when the sale is signed that difference could matter. Tax advice should address this if it spans a possible two tax years (eg Contract 30 May and settlement 12 July)
2. As the company has a "enterprise" and taxable supplies likely will exceed $75K GST registration AT SOME TIME is likley needed. I note the company is already registered. That doesn mean GST should be claimed (yet) !
3. GST applies to taxable suplies ie property sale and as it is NEW residential premises it is taxable at either 9.09% (1/11th) of the contract price OR if the company elects in the sale contract (and are eligible for) the margin scheme it may reduce GST as Terry indicates. This is not assured. Some land when acquired may prevent you being able to sell using the margin scheme. GST withholding will likely occur at the sale settlement with up to 7% tax retained and it is credited back on the next BAS.
4. GST timing can vary and should be given advice
5. The GST on the land may be unable to be claimed even if GST is included in the cost. Tax advice is required. If vacant land is acqured using the margin scheme (very common !!) then GST of $0 can be claimed whether or not a tax invoice is received. If eligible the tax invoice and contract to acquire may need review by a tax adviser.
6. Changing intentiona nd retaining the property to rent may pose some cashflow issues and the tax issues surrounding GST need to be understood so overclaiminmg GST is not a concern. If GST is claimed during the build and then the premises are rented the GST may need to be repaid and only become a credit once again when later sold with some adjustmnet to the amount to reduce it slightly. There are timing strategies to minimise that impact as nobody likes repaying the ATO a significant sum.

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