Wednesday, 16 October 2013

Renovating for Profit


Renovating for Profit

BAN TACS Accountants Pty Ltd How not to be a Developer Booklet - 26 - Created by Julia Hartman B.Bus CPA, CA, Registered Tax Agent


If you buy a property with the intention of doing it up and selling it then you are in business. The property is not an investment so it is not subject to CGT or your main residence exemption. Instead you purchased it with the intention of resale at a profit so the profit is taxed as normal income. Further, if your renovation is substantial you will also have to charge GST when you sell but you can claim input credits and possibly utilise the margin scheme.
If you rent the property out before you renovate you may qualify for large tax deductions when you scrap part of the house or plant and equipment. So you need to consider whether you should get a quantity surveyor in before you start. A deduction for scrapping is only available if the property is rented out during the renovation or it is rented out immediately before the renovation begins and you do not live in the property during the renovation.
If you are in the business of renovating to sell you will have to charge GST if the renovation is substantial. Fortunately, ‘substantially renovated’ is really that; it takes quite a considerable amount of changes before you will trigger GST. Section 195-1 of the GST Act states “substantial renovations of a building are renovations in which all, or substantially all, of a building is removed or is replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases”.
GSTR 2003/3 is the ATO’s ruling on the matter. It is not just based on how significant the renovation is but whether it affects a substantial part of the original property. For example, you could put an extension on the back of a property that is twice the size of the original house but if you don’t renovate the original house then there is no substantial renovation. Superficial changes to all the rooms in the house do not make the renovation substantial either, even though all rooms are affected. An example of this would be painting all the walls.
GSTR 2003/3 specifically states at paragraph 76 that replacing a kitchen, bathroom, repainting the whole property and doing minor repair work, in most circumstances would not be a substantial renovation. Cosmetic work, such as painting, sanding floors, replacing light fittings, curtains or carpets are not substantial renovations even if they affect every room in the house. Replacing the floorboards or electrical wiring in a property gets you into dangerous territory, however, because they usually affect every room in the house and are not merely cosmetic.