Money: A second GST registration may complicate sub-dividing

By John Bassett

Taxwise

My husband is a GST-registered builder. Recently we have thought of buying a property with a reasonably large section. We would intend to keep the house as a rental and subdivide the section so that we could build another house. We would then put the new house up for sale. Do you think it is advisable to separate these activities from my husband's building business and have another GST-registered partnership?

If we did register GST, and if it takes about 12 months for the title to come through for the subdivision, do we register for GST now or 12 months later?

Also, can GST can be claimed for rental properties?

R.O, Auckland.


To answer the first question, it would be useful to know whether you have in mind any particular benefit in establishing a new entity.

One possibility could be that you see merit in separating the proposal from existing activities. Since the proposal involves retention of a rental proposition, you might be attracted to keeping this separate from the building activities.

While there may be an advantage of that kind, the obvious factor pointing in the other direction is the additional administration involved. A new entity would need to be established with its own administrative and banking arrangements. You might find that the most desirable approach is to keep your affairs as simple as possible.

In relation to the second question concerning registration, it would be preferable to register at this point if you do decide to proceed with this alternative. This would be so as to enable the early recovery of GST paid on development costs. It is possible to register at the beginning of development activities even though sales may be several months away.

In relation to your third question, I can confirm that GST does not apply in relation to private residential renting. No GST input tax credit would become available for purchase of the rental house. Nor would you account for GST on the rents received. This treatment would apply even if the rental property comes to be held through the existing building entity.

Finally, I should make some reference to the income tax position. You should be aware that income tax applies where a builder purchases a property, makes improvements and sells it within 10 years of completion of the improvements. This is even though the property may be held for the capital purpose of renting out. To forestall application of that principle, you should make little, if any, improvements to the existing house retained for rental purposes.

* John Bassett is with the law firm Bell Gully.