Hi Guys
Was hoping someone could shed a little light on a stratergy I am using. I am leap froging from property to property adding value as I go and then on selling the propertys. This was all fine until I went to an accountant to make sure I was all on track as far as tax goes. A believed that you do not pay tax on the sale of your principle place of residence. The accountans was trying to explain to me that because this was my only sourse of income, it would be seen as a business and I would have to Pay income tax on any profit I made and not only that, I would also have to be registered for and charge GST on what I was doing as the value of the houses is more than 75,000. What is confusing me is the way the GST would be charged. The income tax makes sence to me, But how does the GST get charged. Is it 10% of the value of the house? or is it charged on my time in fixing up the property? If it were 10% of the value of the house, No one would be able to buy it off of me as the price would have to be so much to cover the GST. Do you see my problem? If any one could help it would be much appriciated.
Terry Dodds
GST is very confusing isn't it! I think GST only applies to residential properties if they are new – ie being sold for the first time, otherwise they are exempt.
BTW, there are a lot of good articles on GST, CGT etc at http://www.bantacs.com.au
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
It is a specalist area in new works however, in the case of residential, generally, regardless of what has been carried out and to whom you are selling it is the vendor who wears the gst component ie if you refurbish, you have paid the gst in the purchase price of the labour and materials used and it stops there. The purchase buys at the advertised price blissfully unaware of the amount of gst that you may have paid. This differs in commercial applications as the sale price is generally exclusive of gst as the premises can be sold as a 'going concern' is there is a business as the tenant and the useage will continue to be commercial (there are five requirements to be met for the gst exemption).
Speak to a tax accountant for clarificationGST is the novice developers end of project nightmare.
There are many that thought they had scraped out of the deal with a 10% profit and feeling very chuffed, only to be hit with a 10% tax bill on the sale price. Sure, you can claim your GST credits back but my understanding is that you need to have been registered for GST before commencement.
At the end of the day, if you make a profit then you will pay GST – best budget for it up front. Understand also that some legal and property costs are GST exempt, but not many.
You pay gst regardless of the profitability – you may or may not pay cgt.
Speak to your accountant about the margin scheme
If your accountant is unsure of this (ie if they don't handle a lot property developer clients) then do some accountant hunting and grab yourself a more specialized one.
I never like to disagree with Terry but for once i have to:
I think GST only applies to residential properties if they are new – ie being sold for the first time, otherwise they are exempt.
This is actually incorrect. The definition in the Tax Act when it comes to 2nd hand properties relates to "Substantial Renovation" and causes many a refurber to come unstuck.
As someone who with my Building partner has bought, strata titled, renovated and then onsold old blocks of units around Brisbane for the last 12 years I have come across this on dozens of ocassions. We obtained a Private Ruling and I would strongly recommend anyone doing it for a living does likewise.
The Margin Scheme will certainly help you but does little to aid profitability if you havent factored in the 10% GST and are relying on this to determine the viability of the deal.
Richard Taylor | Australia's leading private lender
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