I'm wondering if anyone can help me out with a clarification of the following regarding GST payable on the sale of a renovated/rebuilt house.
My wife and I will soon be in a solid enough financial position to toss in our day jobs, and work at our passion – property – full time. Our plan involves buying properties where a reasonably substantial and clever renovation, such as the addition of extra bedrooms, a family room etc, would raise the property from one demographic into the next, thereby lifting the ceiling on a potential sale price. We intend to sell, take our profit, pay our taxes, and move on to the next one, thereby generating cashflow on which to live, and to accumulate buy-and-hold properties.
The trouble is, I've just become aware of a situation where the ATO could view continued activities of this type as an 'Enterprise', and require that GST be paid on the final sale price of the property, before any costs are deducted. To use very simple figures for the purposes of demonstrating the issue, if we buy a property from a private individual (from whom no GST can be claimed back) for say $450K, spend $50K on a renovation, accumulate a further $50K in costs, sell for $600K in an attempt to gross a $50K profit, the ATO will hit us with a GST bill of $55K ($60K on the final sale price less $5K claimed back on the renovation, where the costs of stamp duty plus interest etc generally won't have any GST that can be claimed back.) So, for all our efforts, we end up owing the tax office $5K.
This situation would be a disaster for our plan. I have no objection to paying taxes on profits, but this seems to be a rule purpose-built to stop people doing this at all. Limiting our purchases to those properties where GST can be claimed on the purchase price will cut down our choices to an unacceptable level, and trying to convince a purchaser to pay 10% more for our property to cover GST has a zero chance of working. Can anyone tell me whether the above situation is truly an issue that other people deal with? If so, what the methods that are used to get around this? eg avoid renovations involving building permits, holding the property for a number of years before or after the reno, live in it ourselves for a period of time, etc.
The other dimension to this problem is that we are also hoping to occasionally demolish an entire house to build a new one, and even though the profits can be much larger, it's still difficult to absorb a 10% cut in gross profits before income tax or capital gains tax is applied.
Any insights into this would be greatly appreciated.
Dave B.jefftheunitMember@jefftheunitPost count: 14
I recommend you see an appropriately qualified accountant in regards to this as this is a fairly technical area and will come down to the amount of renovations done on the property and would it classify the property as a new residential property for tax purposes. If you are real keen their is a taxation of propety transactions course i have just done through UNSW for my masters which covers this very topic in depth. It all comes down to a matter of intention and fact and from the facts given I believe you would be subject to GST, but this has a major qualification and you should seek appropriate advice
Thanks for your reply Jeff
I certainly will seek the advice of an accountant on this topic, now that you've confirmed that there certainly is an issue here to be resolved. I just wonder how many other people buying then substantially renovating a property with the view to then selling it (as distinct from a minor refurbishment) are aware of this issue, and whether anyone on this forum has actually been caught in a situation where they find themselves with an unexpected GST bill to pay.
Unless technicalities can be employed to get around the issue, my "business plan" is going to have to have a major rewrite.
Dave B.Richard TaylorParticipant@Qlds007Post count: 11,347
As far as the ATO is concerned then the simple defination as to whether GST is payable is whether the property has undergone "Substantial Renovation" or not.
Having been involved in strata titling and renovating blocks of units in Brisbane for the last 12 years we obtained a private ruling ealier in 2001 on just this.
From what you have described you will be doing to each property I would say that your work would certainly defined as "substantial" and therefore GST would be payable.
Remember you are able to claim the Input credits along the way but still yes it puts a dent in your bottom line.
Thanks for your input as well, Richard. I'm going to talk to a knowledgeable accountant to find out more about this grey area, so that we can work our strategy within the rules to avoid the GST issue
David.Richard TaylorParticipant@Qlds007Post count: 11,347
I think you will find it hard to avoid the GST as the rules now are quiet clear and simple.letParticipant@letPost count: 10
Hi dave, good on you for having a go. We are into major renos too. Currently purchasing no.3 which will be ppor. Intend to do current house area prior to extention as cost with owner builder (OB) are reduced by thousands. This wasnt the plan at the start but a little thinking outside of the square can be very profitable. Im in VIC, we have heaps of info about OB at local council… read..read..read..and find the loop holes. Keeping in mind there is a difference from renovating to building, and timing your projects for permits against project cost has worked for us. The rules may be different in your state though. good luck.
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