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GST of acquisition & sell investment property

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Q: My business client (sole trader), who is registered for GST runs a childcare. She bought a piece of land and decided to build it up and use it as an investment property. Can she claim the GST on the building costs? What are the consequences if she decides to sell once the building is complete?

 

A: The first point is that this investment is not related to the enterprise of childcare operated by the client. We can assume that the property will be leased to tenants when the client decided to use the building as an investment property. Leasing of property is an “enterprise” as defined in s 9-20 of the GST Act, so the issue is whether the acquisition in relation to the building of the premises will be creditable acquisition under s 11-5.the thing must be acquired for a creditable purposes, then the acquisition is a creditable purposes (s 11-5(a)). Those acquisition could be creditable acquisition

since the client acquire the building for a creditable purpose to the extent that she acquires it in carrying on her enterprise (s 11-15(1)).

However, s 11-15(2)(a) says that it is not a creditable purpose if the acquisition relates to input taxed making supplies. Whether this supplies in the case will be input taxed depends on the type of building constructed on the property. If the building is “residential premises” (i.e. a house), then the house rent will be an input taxed supply under s 40-35. Therefore, the acquisition is not an input tax credit under the exception in s 11-15(2)(a). If the building is commercial, then the exception will not apply and the client could be entitled to input tax credit on the building costs. If the client sells the entire building, the GST treatment will depend on the type of building constructed, for commercial, the sale will be a taxable supply and attract GST, for residential, GST depends on how long she owned the building.

Under s 40-65(2)(b), a supply of “new residential premises” is not an input-taxed supply, so if the building was sold as “new residential premises”, it would be a taxable supply and attract GST. However, if the client holds the building and leases it at least five years, then it is not a “new residential premises” and the sale would be an input taxed supply under s 40-65(1). If the building is sold as a commercial building or “new residential premises”, the exception in s 11-15(2)(a) will not apply, which means that your client would be entitled to input tax credit on the building costs.

Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

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