Property Tax:CGT & GST

Presented By: Tasha Hungerford

www.growaccounting.com.auLocated in Maroochydore, Sunshine Coast

Slides Available From:Slideshare

Facebook – Grow Accounting

Sections To Cover

• The Basics• GST Basics• CGT Basics• GST vs. Capital Gains

• Property Transactions & Tax Effects• Subdivisions• Renovations• New Properties• Commercial Properties

GST BasicsGST only applies if you are running a business or conducting an enterprise. These are factors the ATO will look at to establish that:

• Regularity & Repetition – however even one-off transactions can be a business• Major Intention to make a profit on the sale• A business plan exists e.g. feaso’s • Activities are systematic, organised & conducted in a business like manner & records are kept• The person has relevant knowledge or skills

BAS – Business Activity Statement (can register for quarterly or annually – most people do quarterly) (Quarters 1/7 – 30/9, 1/10 -31/12, 1/1 – 31/3, 1/4 - 30/6) Due date 28 days after or an extra 4 weeks if lodging through an accountant or registered bookkeeper.

GST rate is currently 10% . If you have an invoice get the amount of GST by dividing by 11 NOT 10!

GST Basics (continued)

Understanding an ABN – Australian Business Number (different from an CAN). Need a TFN (tax file number ) first.

• There needs to be an ABN per trading entity & they are not transferable. • Can take up to 28 days to get – can also be instantaneous! www.business.gov.au• Each trust will need its own ABN– trustee company never has a TFN or ABN• Each entity only has ONE ABN for life so will have same ABN for different transactions at different

times.• If a JV depending on what is in terms each JV Partner may need their own & report seperately• Can have an ABN but NOT be registered for GST. Once transaction is finished then cancel GST but

leave ABN. ATO making it harder to get them.

Sales/Income threshold $75,000 per year before need to register for GST

Use the ATO GST & Property Decision Making Tool – print out result & keep it as record to show motive.

Margin Scheme

Normally you the GST you pay on sale of a property is 1/11th of the sale price. However under margin scheme you pay GST on the difference between the Sale Price & the amount you paid for property.

When does it apply:

•When you are selling a property and

•Must be a business transaction (profit intention) on applicable properties e.g. on new residential or commercial and

•You didn’t claim GST on purchase or

•Sold to you under the margin scheme or

•Seller wasn’t registered or GST wasn’t applicable

Margin SchemeExample; Susie purchases a vacant block of land for $200,00 from a non-gst registered person. She builds a house & claims all gst costs during construction. At the end she sells it for $440,000.

Margin Scheme No Margin Scheme

GST GST

Sale Price $21,818 * $40,000

Other Considerations:

•Who are you selling to can they claim the GST? They may be willing to pay more if they can claim the GST.

•How this affects the profit of the sale i.e. more GST less cost base so less tax

*($440,000 - $200,000)

CGT Basics

• Applies on the sale of assets acquired for personal enjoyment or income producing benefits.

• Not a separate or special tax. Gain (after exemptions & discounts) is added to other income & taxed at relevant rate for that entity.

• Been around since 20th September 85 – special rules applies to property & land acquired before than & deceased estates inherited from someone who owned before then (review bootcamp notes for rules)

• The most common discount is the general exemption if asset held MORE than 12 months (is contract date to contract date). The amount of discount depends on structure:

• 50% for individuals & trusts• Not applicable at all to companies – therefore a trust should never distribute a capital gain to a company• 33 1/3% in a SMSF

CGT Basics Continued

• Other discounts & exemptions can apply when asset sold is a small business asset – this would include commercial property used in your business, sale of a business. General property sales cannot get these deductions regardless of how many properties you own.

• Capital Losses are carried forward year after year until there is a capital gain to offset it against.• Any capital gain will have the loss applied to it BEFORE discount is applied.• Activities while business like in nature can be just for preparing an asset for sale. This is called Mere

Realisation of an asset.

Business Profit vs Capital Gain

• If property transaction is under 12 months there is no discount & if GST doesn’t apply to that transaction a capital gain or business profit will end up with same tax payable!

• They are always mutually exclusive (EXCEPT new residential)

Business(GST)

Profit Making Activity (GST)

Capital Gain Mere Realisation

(No GST)

Yes

Are you in the business of buying and selling properties?

No

No

Yes

Yes

Yes

Will you be registered for GST at the time of the sale?

Capital Gain - Mere Realisation(GST charged on sale if sold within a 5

year time frame)

No

Yes

Was your original attention to sell the land at a profit?

Does your land have a residential dwelling on it?

Was your original intention to sell the dwelling at a profit?

Are you in the business of buying and selling properties?

Did you substantially renovate/build a new dwelling?

Capital GainMere Realisation

(No GST)

No

No

No

Yes

No

Profit Making Actvity

(No GST)

Yes

Subdivisions: Business Profit or Capital Gain?Can be either depending on original intention:

•Purchase of property 5 years ago with the intention of just renting & then zoning changed. Subdivision would be a capital gain

•Purchase of property 2 months ago & lodging a D.A immediately. Would be a business profit when sold.

•Purchase a property 6 months ago with intention to rent & then started course & became aware of subdivisions. Will most likely be a capital gain unless other factors at play.

Real ATO Cases show how unclear it can be!

Subdivisions: Business Profit or Capital Gain?George Casimaty v Com. of Taxation 1997 1388 FCA 10-12-97

Purchased 988 acre farm from father in 1955 and father forgave obligation to pay for the land. 1956

purchased 40 adjoining acres to build a house. 1963 could not sell the property for enough to cover debts.

In 1965 diary farming became uneconomical. 1967 to 1969 drought effected. 1972 tried to sell the whole

property to state housing department. Rural market depressed so continued farming. Ill-health and high

interest payments forced taxpayer to sell off 3 lots in 1975. More financial problems lead to second

subdivision of 10 lots in 1977 for which Council required roads, water and fencing. More financial problems

in 1983 so 9 lots subdivided included water, roads and fencing. 1988 13 lots roads plus gift of 2 hectares to

son. Council required roads, water, fencing and draining a creek. 1992 16 lots water, fencing and roads.

1993 19 lots. Ill-health suffered from early 1970s but continued to live on the property and farm it a third

remained un-subdivided. Properties were sold by a real estate agent.

WDYT?

Subdivisions: Business Profit or Capital Gain?Stevenson v Com. of Taxation 1991 29 FCR 282

446 acre farm owned by family since 1904. 26 acre single block sold 1965. 360 acre block sold 1971.

Another 35 acres sold when taxpayer reached 70.

The balance was later subdivided and attempts made to sell it with development potential. After 1985 180 blocks subdivided finance by considerable borrowings as council required extensive water and sewerage works . Development done in 8 stages. The taxpayer was very involved in the development right down to selling the land himself rather than appointing an agent. The taxpayer had no previous development experience.

WDYT?

Subdivisions: CGT Implications

• Capital Gain occurs when you sell, not when you subdivide.

• For the purposes of working out your capital gain or capital loss, the date you acquired the subdivided blocks is the date you acquired the original parcel of land and the cost base of the original land is divided between the subdivided blocks on a reasonable basis.

• If you subdivide the land on which your PPR sits, you will lose the PPR exemption for any block sold separate to the PPR

Subdivisions: Business Implications

• Treated as ordinary business income

• No 50% General Discount

• Property treated as trading stock

• GST applies if turnover >$75K and buildings (if applicable) <5 years old

Property Renovations: Business Profit or Capital Gain?

ATO Views three kinds of renovators:

•Personal Investor (CGT calculations, no GST)

•Business of Property Renovation:• No CGT• Pay tax on net profit• Property treated as trading stock• GST applies if substantially renovated• Will have other business costs e.g home office

•Profit making activity of property renovations:• Pay tax on net profit• CGT may apply• GST applies if substantially renovated • No other business costs can be deducted

GST on Property Purchase & Sales

• Rules are different for different types of properties:• Residential• Commercial• Commercial Residential e.g. Caravan Parks, Hotels & Motels

Residential Transactions & GST

Types of Residential:

“New” property – can also be created through substantial renovation:

•Claim GST on purchases to sell new property (e.g. real estate fees)

•GST is applicable on the Sale

•OR apply the Margin Scheme

Off-the Plan

•GST on purchase of property at settlement

•If “right” sold before settlement no GST applicable unless this was your intention

Existing Residential Property – no GST applicable

What is a “substantial renovation” Substantial renovations occur where all or substantially all of a building is removed or replaced. They must directly affect most rooms in the house.

Renovations can be structural & include:•Foundations•Supporting Walls •Roof•Staircases

What isn’t a substantial renovation just by itself:•Replace wiring•Non-supporting walls•Plastering or rendering walls•Replacing kitchen & bathroom cupboards•Cosmetic e.g. painting, sanding floors, light fittings, curtains & carpets•Additions•Landscaping

Balancing Adjustments

When is a new building not a new building!!! After 5 years being rented IF it wasn’t for sale?

GST on Commercial Property

Commercial Properties are shops, factories & offices

Purchase:

•If seller is registered for GST & you (the purchaser) intend to use building in your GST registered business you can claim GST credit on purchase

•If the seller applied the margin scheme you cannot claim GST

•However most time seller uses “going concern” & is sold GST free

Sale

•May be eligible for margin scheme

•Going Concern

•GST

Going Concern

Going Concern normally applies to sales of businesses. However can also apply to sale of commercial properties.

The sale of a commercial property will be GST free if these conditions of a going concern are met:

•There is a payment

•The purchaser is registered for GST (or required to be)

•The buyer & seller agree in writing the sale is a going concern

•Must sell all the things necessary for the continued operation of the business

•Property must have a tenant in place or have had a tenant in the past & now advertised for sale.

Lets mix it up – GST on Commercial ResidentialWhat is commercial Residential:

•Hotels, Motels

•Caravan Parks

•Holiday apartments & units

•Hostels & Boarding Houses

GST on purchase & sale is the sale rules as on commercial properties EXCEPT sale of Holiday apartments or units (then residential rules apply)

Rental Income

Residential:

No GST claimable or payable on rental property income & expenses

Commercial:

GST Claimable & Payable on Rental Property Income & Expenses

Commercial Residential:•Short term – less than 28 days has GST•Long term – more than 28 days you have a choice:

• Treat as residential rent or• Work out GST on half the GST-inclusive price that would apply for up to 28 days & then add this onto the gst exc

rate.

QUESTIONS?!