Hi guys I was wondering if someone can help me with some questions on the financial ramifications of building a duplex.
This is the scenario:
1) I have a company set up under a trust format. The business of the company is property development.
It buys land – $200,000
Builds a duplex – $400,000
Total cost is $600 000 for both units complete with land.
Units can be sold for $350,000 each giving a profit of $100,000
Questions:
1) Capital Gains Tax is not payable? – any profit is treated as income and taxed at company rate ie 30%. Is this correct?
2) Is GST payable?
If yes…
Is it payable on the FINAL SALE VALUE of the whole duplex including land cost?(ie on both units $700,000 = $63,000 GST?)
or
Is GST payable on the BUILDING COST of duplex ie on $400,000 = $36,000 GST?
or
Is GST payable on the FINAL VALUE minus the cost of the land (ie $500,000 = $45,000 GST?)
3) What GST costs can I claim to balance this:
Can I claim GST charged in the building cost by the builders?
Can I claim GST in the cost of the land?
Can I claim any loan expenses?
Can I claim Council/Government charges?
4) Can I sell one unit with GST (while keeping the other) and claim all the GST from the TOTAL building cost against this single unit sale to minimise GST payable?
5) After 5 years GST is no longer payable as the units are no longer considered new. Is this correct?
Thanks guys, I know my question is a little long winded but I would appreciate any advice or guidance on building a duplex as it seems that you can actually lose money even if you make a profit!? (depending on your GST obligation)
Regards,
Tony P
Hi Tony,
Sounds complicated and risky.
I have recently completed a duplex project and am about to build my second. Firstly a good accountant who has experience with property should be able to give you most of your answers and you will need one to do your tax returns anyway. For what it's worth I can give you my tale. I proceeded with the project as an "investment project" ( jointly owned with my wife ) and therefore had the "intention" to hold them longer term. Once you have this intention then you are acting as an investor rather than a developer. Therefore you are not subject to any gst implications. This does not mean that you cannot sell the properties. If they are sold before 1year passes from exchange of contracts on the land (to exchange of the duplex) then you will be up for full CGT. If you wait till after 1 year then you will get the 50% CGT discount. In my case I paid 580k for the total project and after 14mths sold 1 of the duplex and held the other. The one I sold went for 400k. 10k in agents fees meant we got 390k. Therefore the profit on this one was 390k minus (580k / 2) ie: 390 – 290 = 100k. With the 50% capital gains discount this reduces the profit to 50k which is taxable. Since the property is jointly owned with my wife we split it again in 2 and, as a result, we each have to add 25k to our normal taxable income for the financial year and it gets taxed at our marginal rate we land in. So we will probably pay 10 – 15k tax in this situation – an overall earning of 85 – 90k. This is a fairly simple breakdown of what can happen tax wise. We had more incentive to sell because we actually had a capital loss to offset our tax liability. I didn't include the sums here as I didn't want to complicate the figures.
I would also pose the question to those who say "never sell". In this case I could have held both duplexes and accessed the increased equity in the one I sold to proceed with my next project. The problem arises that to access equity you need to get a valuation which is nearly always below the real value. In our case the units were valued at 380k on completion. Therefore I could only access 80% of the value which was 304k. Accessing 304k rather than selling for 400k would have made it impossible to proceed with my next project which will probably profit around 150k. Although I agree with the buy and hold principle sometimes you need to sell if there is good reasoning behind it. (Unless someone out there can convince me otherwise)!!
Hope this helps Tony. Keep analysing but don't put off the decision too long. I don't know where you are investing but I can sense that their is a boom looming on the eastern seaboard of Oz. Developing has created a huge amount of equity gain for us and this will be greatly enhanced in the current rising market. Good Luck!
Regards, IanHi Tony.."
The business of the company is property development" This makes your situation a bit different to Ian (no disrespect intended Ian).
No CGT if its sold in the business of development, GST will be paid and can be claimed.. there are tax implications if you hold one/both after building them, after 5 years. (not sure on this one but I believe 5 years triggers a tax event, either CGT or GST)
If the Company is doing the business, income from the deal will be taxed at the Company rate for the years profit. If you have expenses in running your Company paying wages super etc, these can reduce your total income for the year. You will be taxed on the remaining profit.
Note: this is if the Company is doing this as a business, if the Company is simply a trustee of the trust, and doesn't have direct involvement in the business dealings, things will be different.
The GST part can be complicated, especially if you get wrong, which is why you need to talk to an accountant or someone at ATO who understands development. Not all do, my accountant only knew about negative gearing for mum and dad investors and losses were always good… not much help with these types of develpment/Gst issues.
Hope this helps,
Cheers
Tony R.
Thanks guys, that was very helpful.
I am based in NSW. Any suggestions for areas to look at?
Regards,
Tony P.Hi Tony
I have a separate Company with my Builder Partner so might be able to answer a few of these for you.
1) Capital Gains Tax is not payable? – any profit is treated as income and taxed at company rate ie 30%. Is this correct?
This is correct if you are in the business of buying and selling / developing. If this is a one off project then CGT will be payable.
2) Is GST payable?
This will depend on the answer to Qu 1) above.
If you wanting to clasify this as Trading income and intend to do it continually then GST will be payable upon the end sale price.
You will however have claimed the input credits long the way for the expenses.
If the properties are hold indefinately then GST will not be payable.
3) What GST costs can I claim to balance this:
Can I claim GST charged in the building cost by the builders? A) Yes
Can I claim GST in the cost of the land? A) Depends if the land was purchased + GST.
Can I claim any loan expenses? A) You can claim the GST applied to any good or services such as application /valuation / solicitors fees etc. Any other non GST fees are merely an expense and added to the Cost Base of the project.
Can I claim Council/Government charges? A) As per loan costs. Most Council contributions etc are GST free. Such costs as survey / architects costs can be claimed.
If you do this again you are better of purchasing the property under the Margin Scheme however this will need to be reflected on your purchase contract.
Richard Taylor | Australia's leading private lender
Tony
Sorry i posted my answer before finishing.
4) Can I sell one unit with GST (while keeping the other) and claim all the GST from the TOTAL building cost against this single unit sale to minimise GST payable?
No costs would need to be apportioned on the floor area of each unit. If they are identical size then 50% of the costs would be claimable.
5) After 5 years GST is no longer payable as the units are no longer considered new. Is this correct?
A) GST is only payable on new items so therefore if you tenant the property and then resell it down the track no GST would not be payable.
Richard Taylor | Australia's leading private lender
Thanks Richard,
Can you please clarify what you mean by 'purchase the property on the margin scheme'?
ie Do you mean that if I can sell both units for a total of $700,000 then I deduct the $600,000 (land and build cost) – then I pay GST on the $100,000 profit?
Regards,
Tony PHi All,
I just want to ask if gst is payable on the sale price if you are developing under the name of a trust (discretionary)??
cheers, Andy
Tony
The margin scheme is a method of calculating the GST payable on the following supplies of real property:
- the sale of a freehold interest in land
- the sale of a stratum unit, and
- granting or selling a long-term lease.
Normally GST is one-eleventh of the price of the supply. However, if you choose to use the margin scheme for your supplies of real property, then the GST payable is one-eleventh of the margin for the supply.
Eg:
Bill is a property developer who is registered for GST. On 20 September 2005 he bought land for $80 000. The supply of the land to him was not a taxable supply. He sold the land two months later for $102,000. He chose to apply the margin scheme to his sale of the land. Under the margin scheme, the margin for the supply of the land is $22,000 ($102,000 – $80,000). The GST payable on the margin is $2,000 (one-eleventh of $22,000).
Andy – Yes GCT is payable when purchasing in a Trust structure however if you are developing then as previously mentioned no CGT will be payable although the profit will be treated as trading income.
Richard Taylor | Australia's leading private lender
Qlds007 wrote:5) After 5 years GST is no longer payable as the units are no longer considered new. Is this correct?
A) GST is only payable on new items so therefore if you tenant the property and then resell it down the track no GST would not be payable.
Richard,
if this is the case, would you still be able to claim the GST input credits (for the development work)? What is then done with the GST credits paid during the development, do you get them back?
Would this apply to commercial development where you are selling a) as a going concern? b) as a vacant possession commercial unit/office? [as these are normally noted +gst]
ThanksJust shows the different tax results you can get depending on your intention AT THE START. For example gee, imagine if someone was paying GST at full rate and then finding out you could have used the margin scheme. Speaking with my accountant's hat on, these type of things need to be worked out at THE START. Also dont let tax run your life .
Thanks again guys, all very useful information .
However I have one more question,
Can anyone tell me what the process is for the strata subdivision of a duplex? and what responsibilities the new owners and/or developers have?Tony P
Hi Tony,
I have just completed strata titling my duplex so will try and remember the steps and costs.
First you need a surveyor to produce the plans for you so you can submit them to council.
To get them through council you will need to satisfy them that the project is completed to final occupancy stage.
Once council approves the plans your solicitor will organise with your bank ( if property is mortgaged ) to release the title and it all goes down with the council approved plans to the land titles office to be registered.
That's it in a nutshell. The cost to me was around 6500.00 for the whole process.
Once the strata title is registered you need to get strata insurance and set up the body corporate, establish Strata Rolls, and hold the Inaugural AGM. We employed a specialist to do this for us for a cost of around $260. Insurance was around $900 for the 2 Units. Body corp. meeting have to be held anually by law and minutes of the meeting be taken. With my duplex it is simple as they were detached units with no above ground common property so the only item on the agenda will be payment of the insurance. This will be split between the two owners. If you own both then you have to meet with yourself!
Hope this helps,
Ian
Gooday
Reading your experiences w/ interest.
I'm looking at a property that is an attached dual occupancy – on one title. Land size 860sm. Property has potential to be either sub divided or strata titled- & later sold off as 2 properties. Its a brick & tile joined by 2 side by side garages.
Initial inspections indicate it is separately metered & fire protections in place.
Question is which is the better way to go ? Subdivision or strata title.
The offer: A conditional offer is being proposed. How would that be worded ?
What exactly can I apply for at Council while the property is under another individuals name/title ?
And what are council going to be willing to provide given it is someone else's property ?
Is the offer made conditional on my making the application to council w/ the owner's consent ?
Calls to Council have resulted in my being advised that if a Building Certificate has been issued in the last 2 years then an application to strata/subdivide can be made based on 'it being an exempt development application'.
Again what rights do I have to apply while the property is in anothers name.
Look fwd to someones expertise !
Hi Sogni1,
Question is which is the better way to go ? Sub division or strata title.
I think you would need to strata. Especially if the property only has one sewer connection and if there is common property. eg shared underground plumbing and electricals and joining walls.
The offer: A conditional offer is being proposed. How would that be worded ?
See your solicitor and they will word it for you. You may be able to get the vendor to take it off the market for a week or two so you can do your investigation. Which state are you in?
What exactly can I apply for at Council while the property is under another individuals name/title ?
And what are council going to be willing to provide given it is someone else's property ?Council should answer this. Go and speak in person with the relevant department that handles strata approval.
Is the offer made conditional on my making the application to council w/ the owner's consent ?As above, ask if they are willing to give you time to check it out.
Calls to Council have resulted in my being advised that if a Building Certificate has been issued in the last 2 years then an application to strata/subdivide can be made based on 'it being an exempt development application'.This means that you don't have to lodge a DA but still will be up for some costs. I paid council around $350 to do the checks to enable the strata plans to be signed off. Once this is achieved then the rest is merely processing with the titles office. Not sure of the process if the property is over 2 yrs. I guess you will have to lodge a DA and submit more documentation, advertise the proposal, etc.
Again what rights do I have to apply while the property is in another's name.
See your solicitor
Look fwd to someones expertise !
My expertise is pretty limited to one project in NSW but I hope it helps. Keep your eyes wide open and get sound legal advice from a professional. It's worth paying someone for peace of mind.
Good Luck, Ian
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