Taxing property developments.
Taxes can be your worst nightmare !
Undertaking Developing property will have tax implications, and the type of tax you may ultimately pay can determined by what your intentions are with your property. Overall property development can be a very profitable opportunity but there a few speed humps to negotiate. One of the biggest is tax.
This is a story about Sam. Sam is new to property development and decides he wants to develop his corner block. Sam’s circumstances is typical of how quickly things can go wrong when developing a suburban block! This is his nightmare.
Let’s take Sam circumstances and explore where he has run into roadblocks. He owns a block of land and has always dreamed that one day he would develop it with three spunky looking townhouses.
Sam starts his development and starts to builds the three town houses. He then gets told by him mate Bill that he can claim GST as he goes and claims back the GST. In the end, he sells one property, keeps one as a rental and lives in one.
So this where Sams tax nightmare begins
Let’s take the GST aspect of the project!
Based on Bills advice at a bbq, that the ATO will give him large GST refund, Sam registers for GST. He has claimed the GST back on the build of all three houses. Hmm this is cool says Sam as the ATO refunds roll in. Oh, what usually happens then is the ATO send out a desk audit letter asking for calculations on a large refund quarter. Only one townhouse is being sold, so only 1/3 of the GST can be claimed so he must return 2/3rds of the GST. He must now fess up to the other two not being sold as the new residential property
He then sells a property. The property he sold is regarded as new residential property. Under the new laws passed 28th March 2018, the Purchaser must remit 10% of the proceeds to the ATO. Hmm so this will impact on his GST.
All of a sudden Sams cashflow and profitability mapped out before he turned a patch of dirt has ended up not so profitable and he must find the GST he failed to account for when first doing his budget.
But wait there is more. Sam also didn’t seek advice and forgot to nominate the GST Margin scheme in the sale contract! This leads to a higher gst liability than he may have needed to remit. The margin scheme is applied to reduce the amount of GST payable on the sale and is calculated on the difference between the purchase price and the sale price. When using the margin scheme, you’re still entitled to claim the credits for any GST you have paid to your suppliers.
Of course for this property, Sam was regarded as a developer and will most likely pay tax at his marginal rate. He is maybe able to treat part of the sale of land as a capital gain event.
Sams development is a typical three townhouse development scenario that has implications for tax throughout the project. We recommend a project plan be developed with a professional input by a qualified adviser. Cash is king in any project and knowing where the tax will fall and when will be incurred helps you plan for a successful and profitable project.
Added to the Sams tax worry was the development levy of $20,000 by the Council and now the Land tax on the part property. More taxes when will this end he says!
I went to Sams house for his house opening, and while he has suffered some tax pain developing his property, I must say the result is a fantastic home and entertainment area designed for years to come. Unlike Sam, we recommend seeking professional advice early. The information given in this article is of a general nature and should be seen as a guide but not relied on. Sam is not his real name, but there are many Sams in this world the ATO are chasing for not declaring the GST on their development correctly, so watch out !