Tax with Max: Property developments and taxes

Property developments and taxes payable, and applying for the age pension before December 31, 2014

Summary: Property developers can be subject to both capital gains tax and goods and services tax (GST). But CGT can be minimised if property is held for a minimum of 12 months, while GST can be reduced or eliminated if property is rented out for five years.

Key take-out: If developers intend to sell off the plan, or immediately on completion, GST would be applicable on the selling value. However, developers can claim all of the GST included in the goods and services paid during the building phase.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Property developments and taxes payable

I bought a property with an old house on land for an amount of $500,000 in February 2014. Then I decided to knock down the existing house and rebuild a block of four townhouses. I am planning to sell all four units for a total selling price of $1.6 million. What taxes will be payable if the total cost to build the townhouses is approximately $1.25 million? What is the best way to minimise tax?

Answer: There will be two lots of taxes that you could be liable for. The first, that will be virtually impossible to avoid, will be capital gains tax. The second is Goods and Services Tax, which could be avoided depending on how you organise the sale of the townhouses.

As you are entering into a profit-making enterprise, and the value of your sales will be more than $75,000, you could be forced to register for GST as new residential properties that are less than five years old when sold are subject to GST.

This means if you built the four townhouses and sold them off the plan, or immediately after they were finished, you would definitely be liable for GST on the selling value. You will, however, be able to claim all of the GST included in the goods and services paid in building the townhouses.

Because the original property more than likely did not have GST included in the purchase price you should be able to use the margin scheme for calculating the GST included in your selling price. To do this the contracts of sale for the four townhouses would need to state categorically that the margin scheme is being used.

To calculate the amount of GST included in the selling price, under the margin scheme, the non-GST inclusive cost of the original property purchased must be allocated across each of the four townhouses. This original purchase price is then deducted from the selling price of each of the townhouses. The GST included in this selling price is one 11th of the net amount.

If you did not use the margin scheme to calculate the GST, and sold the four townhouses for $1.6 million, the GST included in the selling price would be $145,455. If the margin scheme was used the amount of GST payable to the ATO would be $100,000. You would have also been able to claim $65,909 of GST included in the construction costs.

If you sold the townhouses immediately tax would be payable on all of the profit made. On the basis that you used the margin scheme, thus producing a net after GST selling value of $1.5 million, with a total after GST construction cost of $1,193,091, capital gains tax will be paid on the full $306,909 profit made. The actual tax payable will depend on what other income you have earned in the year you sell them.

If instead of selling the townhouses immediately you rented them for at least 12 months you would only pay capital gains tax on half of the profit made. If you chose to rent the townhouses for a period of five years you would not only save paying tax on 50% of the capital gain made you would also not have to register for GST and not have to pay GST on the selling value.

By holding the properties for the five-year period you would achieve a GST saving of $34,091. This has been calculated by deducting the $65,909 of GST included in the construction costs of $725,000 from the $100,000 GST included in the selling price.

Applying for the age pension before December 31, 2014

I am about to turn 75, am single, no longer work and have $450,000 in super from which I draw an account-based pension at the minimum percentage allowed each year. I own my own home and my other assets are $35,000.

So far I have resisted applying for the age pension for philosophical reasons. But I have finally decided that I should do so. I am confused about the deeming rules and the changes that are supposed to come into force in 2015. Can you explain how these rules affect a pension applicant in my situation? I am unsure whether I should wait until after the new rules come into effect.

Answer: You are not alone when it comes to not applying for the age pension. Unfortunately, if you do not apply for the age pension before December 31, 2014 you could find yourself disadvantaged by the new rules that commence from January 1, 2015.

Also, by applying sooner than later you will also receive a pensioner concession card. This concession card not only reduces your medical and pharmaceutical expenses but you will also receive discounts on your council rates, water rates, energy bills, motor vehicle registration, and public transport fares.

By applying for and receiving the age pension now you will also lock in the current treatment of your account-based pension for as long as you receive it. As you are of age pension age you will be entitled to at least some age pension as the total value of your assets counted by Centrelink is below the cut-off point at which no pension is received.

The actual amount of age pension you receive will depend on the lowest amount of age pension payable under either the assets test or the income test. There are two limits that apply under the assets test. Once a person’s assets exceed the upper limit, which for a single home owner is currently $748,250, no age pension is receivable.

Where a person has under the lower asset test limit, which for a homeowner is $196,750, they receive the full age pension. For every $1,000 that a person’s assets exceed the lower asset limit there is a decrease in the fortnightly pension receivable of $1.50. In your case as your total assets are $485,000 they exceed the lower limit by $288,250, which results in a fortnightly reduction in the age pension of $432.37.

As you would qualify for the age pension prior to the commencement of the new rules, and assuming that the $35,000 in other assets are for such things as household furniture and non-financial assets, you will only be subject to the net income test on your account-based pension.

Because the account-based pension you currently receive will be reduced by the purchase price of the pension, and because you possibly started that account-based pension several years ago when you had a higher life expectancy, you should commute your current account-based pension and commence a new one before applying for the age pension.

With your account-based pension currently being worth $450,000, and as a 74-year-old female you have a life expectancy of 14.27 years, the purchase price for a new account-based pension would be $31,535. Once you turn 75 the minimum pension payment will be 7%, resulting in a pension payment of $31,500. As this is less than your purchase price the income test would not apply.

The maximum basic pension payable currently is $766 a fortnight. This means after deducting the reduction applicable under the assets test of $432.67 you would be eligible for a basic pension payment $333.63. You should also be eligible for a supplement payment of $62.90 a fortnight.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au

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