Forums / Property Investing / Help Needed! / GST and possible other taxes on development.

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  • Profile photo of Solomon10Solomon10
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    @solomon10
    Join Date: 2010
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    I have had a look around the net and haven’t managed to clarify exactly what tax would be paid on a small unit development, done by an private investor. I understand all the GST implications, the information i’m after is, would income tax also have to be paid as well as the GST?
    To me, just the GST doesn’t seem to be enough tax, where as GST and income tax on top seems too much. Thanks in advance,would love to hear from anyone in the know who can answer.

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
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    CGT (Capital gains tax).

    Look into the “Margin Scheme” with respect to GST.

    Jacqui Middleton | Middleton Buyers Advocates
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    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Tracey BTracey B
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    Hi Solomon,

    Agree with JacM,yes, there’ll be both if you sell for a profit.

    T

    Profile photo of Solomon10Solomon10
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    @solomon10
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    Thank you both for your replies and clarification, i will look into it further and add in CGT to the calculations.

    Profile photo of TerrywTerryw
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    @terryw
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    CGT probably wouldn’t apply to a development, but income tax. GST. Stamp duty also. And don’t forget land tax

    • This reply was modified 4 years, 3 months ago by Profile photo of Terryw Terryw.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Profile photo of Solomon10Solomon10
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    @solomon10
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    Thanks Terry,my understanding now is, if sold in under five years GST would apply,and profits after GST and costs would be added to taxable income for the year. If sold after five years of being rented, no GST would apply and CGT should apply instead of income tax. Seems a better way if can afford to hold them for six or so years.

    Profile photo of BuyersAgentBuyersAgent
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    @knightm
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    To understand a couple of options re ownership, and investing vs developing check this out
    http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf

    BuyersAgent | Precium
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    South Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW

    Profile photo of PimobpiPimobpi
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    @pimobpi
    Join Date: 2013
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    Thanks Terry,my understanding now is, if sold in under five years GST would apply,and profits after GST and costs would be added to taxable income for the year. If sold after five years of being rented, no GST would apply and CGT should apply instead of income tax. Seems a better way if can afford to hold them for six or so years.

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    Hi Solomon & all,

    I am quoting your above comment as I believe that the GST situation is a little more complex than simply holding a development property for 5-6 years and then not paying the GST back but then paying CGT with income tax. (BTW, I am really hoping that I am wrong) & I want the GST experts on this forum to prove it. GST is complex so I am hoping that there are new rulings or that I have misinterpreted the law.

    There are only 2 ways in which you can hold a development property for more than 5 years & the outcomes of both scenarios are very different indeed.
    Scenario 1: You hold onto the development property & rent it out for more than 5 years. You do not actively market it for sale during that time. ***Not marketing the development for sale (due to soft market or whatever other reasons) is deemed by the ATO as a change of your intention***.

    Consequences for scenario 1: You are forced to make decreasing GST adjustments for the GST credits that your received during the construction phase. I believe that the time period for this adjustment is approx 12 months after every GST credit was claimed therefore you would have paid back 100% of the GST credits within the 1st year of holding onto the development property. If you undergo this “adjustment” & pay back all of the GST & you actually end up selling the development within a 5 year period then the ATO allows another type of GST adjustment (increasing). This increasing GST adjustment basically gives you back an apportionment of that original GST credit depending on which year you sell. 2nd year sale give you back more GST credits than a 4th year sale as the longer it takes to sell the closer the property is labelled “used” and not “New” stock any longer. (If you sell the development after 5 years then you are liable for CGT just like any “used” stock is treated.

    Scenario 2: You hold onto the development property & rent it out for more than 5 years. In this time you actively market it for sale.
    Consequences for scenario 2: In this case of actively marketing the development for sale, it will not matter how long you rent it for, the GST is never wiped out. The 5 year count down only starts when you are not marketing it for sale whilst you rent it. In this scenario you can sell the development after 10 years and it is still considered new stock. GST & income tax rules apply.

    The difference to both of the above examples is your intention with your actions because that determines whether or not the ATO deems that your intention has changed. From what I can see with your plan, there is no GST free situation that will be beneficial. (Either it is paid back in full soon after construction or anytime after). I used to believe that a developer could simply hold onto a development property & rent it out for more that 5 years after construction and the GST would be wiped (without being paid back earlier) but I cannot find/prove this by searching the ATO site.

    Hopefully somebody will prove me wrong but I’ll be very happy with the egg on my face (for just this time).

    Cheers.

    Profile photo of PimobpiPimobpi
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    @pimobpi
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    Actually I am now very sure that my above entry is extremely incorrect.
    Hopefully someone with GST knowledge will assist.

    What happens with GST if a newly created property is rented (because it cannot sell)?

    Profile photo of PimobpiPimobpi
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    @pimobpi
    Join Date: 2013
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    OK, I’ll have one last bash at this one.
    This is what I have found elsewhere so I don’t know how accurate it is but I think it best describes the GST situation:-

    1) you build a residential property

    2) if you claim GST credits throughout construction

    3) if you sell, you build your gst into the price and remit back to the govt

    4) if you keep and you have been claiming the gst, then approximately 12 months after the date that a tenant moves in and commences paying rent you must calculate how much gst you claimed on that particular property and pay it back to the govt

    5) if you leave the property vacant then the point above does not happen

    6) property is considered new for 5 years, so a sale during that 5 years will incur a gst obligation to the govt

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