Has anybody had any experience with buying a House & Land Package through a Corporate Trustee/Trust setup?
We have a Discretionary trust with a Company as Trustee. The trust has been registered for GST.
We have just bought a House & Land Package through a developer, which means the land and the house are separated in the contract.
Vacant land attracts GST.
My question is that seeing as the trust is GST registered, are we entitled to claim a GST credit on the land? I know that you cannot claim GST on any of the construction costs of the building but it appears that land is handled differently.
I have tried to find info on the ato site but to no avail. All I can find has to do with a margin scheme which can be employed by the developer but I really can't make head nor tail out of it.
I have an accountant looking into it, but I thought someone out there might have had a real experience with this.
I'm also concerned with what happens when we sell the property. Are we going to have to pass the GST on in the sale?
Any comment appreciated!
ThanksBob AndersenParticipant@bob-andersenJoin Date: 2007Post Count: 36
I'll assume the land you are buying is new, direct from the developer, and not 'secondhand'. "Secondhand ' land would not be effected by GST. I also assume you have a contract for the land and a building contract with a builder. The land developer and the builder might or might not be the same entity.
As you are probably aware the building contract price contains costs, most of which carry a GST component, which the builder will claim back as tax input credits. He will be registered for GST.
The land developer would be registered for GST and more than likely would have bought his land under the margin scheme. The development of the land would have incurred costs carrying a GST component. When he sells you the land he will remit one eleventh (GST component) of the selling price to the ATO and would have claimed back the tax input credits from the costs carrying a GST component during construction.
Therefore I would expect that there is no GST to be claimed by your entity. You are neither the land developer nor the builder. If you on sell the house on completion there will be no GST ramifications as it will be deemed to be a 'secondhand' home. Your entity will simply pay income tax on the profit. If you hold it as an investment and rent it out it will be treated as an investment property and subject to normal income tax and / or cgt rules if you sell at a later date.
Thanks very much Bob.
I thought as much but it was a little confusing.
On the purchase of land, would I be correct in saying that there would be no circumstance where the gst would be claimable?
If bought from a developer, they would most likely have used the margin scheme in which case you couldn't claim the gst. And if it was bought privately (i.e. 'secondhand') there would be no gst anyway.
In your opinion, would you say that there are no gst implications with regard to residential property? i.e. gst is not claimable and there is no requirement to charge the gst on the sale. (Unless you were the actual developer.)
Would a block of land bought for commercial purposes (eg. to build a shed on to lease out) be handled the same way?
Why is your trust registered for GST if it is just a passive investor, ie; rental investment? Passive investors aren't required to register for GST, unless the rent is commercial and your annual rent is at least $75,000, not including GST. Not being registered is usually better because you won't have to pay 10% of your income to the government.
Residential rental does not attract gst and neither do sales of residential property, so where would I have to pay 10% to the government?
However, being registered for gst means that I can claim back any gst on purchases I make relating to the business. For example, if we buy tools and such for renovations or pay for any labour, we can claim the gst back on those purchases. I also claim the gst back on my mobile phone bill, the registration fees for the trust and company, accountants fees etc. Basically any purchase made in relation to the business of the trust.
I hope to heck that I haven't got it horribly wrong and that I need to start charging gst on things like rents! Or worse, having to pay 1/11th of the entire income we make through the trust to the govt.
GregBob AndersenParticipant@bob-andersenJoin Date: 2007Post Count: 36
Don't panic. Remember what GST stands for – goods and services – not income.
Had me worried there for a second.
The trust is a business just like any other. I thought it a little strange that it would have to pay gst out of income generated from gst exempt items. And being a business registered for gst it should be able to claim any gst paid for goods or services used within the business activities.
Ross, do you know something I don't? Is this setup somehow in violation of tax laws?
Is the trust actually carrying on a business? Or merely investing in real estate? In which case the GST on expenditure is related to input taxed supplies and so it cannot be claimed back. If the trust is carrying on a business of developing property then there probably will be GST on the sale of the property, or at least the margin. Be very careful about what your activities are, because if you are claiming to be in business then, apart from the GST issues, you won't be eligible for the 50% capital gains tax concession, which is only applicable to passive assets.
Hope this helps.
Thanks for your comments. You're certainly giving me a few things to think about.
Let's set up a scenario. Say this year the trust buys a block of land, subdivides it and sells it as separate blocks. It also buys a house, renovates it and sells it. Also, it buys a house from a developer/builder as a house and land package, does nothing to it and sells it.
From what I understand, the subdivision would attract some gst. And there is also a margin scheme which I don't fully understand at present. I have much more research to do with this one, but you should be able to claim the gst back on any expenses incurred.
The renovated house would not attract gst on the sale (either in or out) as it is sold as a residential property. But why would you not be able to claim the gst on any expenditure made to do the renovations?
And the house and land package does not incur gst as, again, it is a residential property. GST on the building is not claimable as it is input taxed, and, as I've learned through this thread, it is not possible to claim the gst back on the land because of the margin scheme. I can live with that, but why wouldn't you be able to claim gst on the acquisition and sales costs?
I know this may be a bit simplistic, but how is it different from, say, a supermarket selling taxable and non-taxable supplies? Is it not able to claim the gst on the transportation costs of the apples but it is for the bottled soft drink?
I hope this doesn't come across as contemptuous. I certainly don't intend it that way. I'm just trying to get my head around this and make sure I don't screw it up royally! And I'm certainly not in the game of tax avoidance or trying to claim anything I shouldn't, but I certainly do want to claim everything that is legally possible.
Glad to try and shed some light on your situation. As you've said, if the property was developed/sub divided then you would probably be regarded as in the business of property development. Thus you would be required to register for GST, assuming you exceed the $75,000 turnover threshold. As you would be registered for GST, you would be able to claim GST on any expenditure related to the development, and you would be required to include GST on any sales, possibly using the margin scheme, where basically you pay GST on the margin between the sale and purchase prices.
The renovated house is an area of contention/grey area. If the house is regarded as a passive investment then there would be no GST, either claimable or payable, as GST is not applicable on input taxed supplies, which passive investments are. If however, the renovated house was regarded as part of your property development business operations then the GST situation would be as per any property development as mentioned above.
The house and land package is identical to the renovated house, with regards to GST.
The supermarket business is able to claim GST on expenditure because some of the items are regarded as GST Free, a technical difference to input taxed supplies, and the supermarket is carrying on a business.
So, the main thing to consider is whether or not you are in the business of property development or a passive real estate investor. You don't actually get to choose this, it is decided by the facts of your activities and whether the ATO would consider you in business or not. Julia Hartman (Bantacs) has a great fact sheet on how to not be a property developer, if you'd like some more info.
Hope this helps.
Thanks for your help Ross.
It appears to me that the big winner here is the ATO. They seem to get the biggest slice of every pie. But I guess that's no surprise.
Looks like I've got some studying to do. If you want to play the game you have to learn the rules!
Thanks again for your comments guys.