The property development industry in Australia is booming. But, as with most financial endeavours, it’s important to know what you’re doing. This is particularly true when it comes to understanding the GST implications of buying and selling property.
You need an experienced, savvy accountant on your side.
Here are 6 common GST mistakes on property developments that we see people make, and how you can avoid them.
Contact Liston Newton Advisory today to discuss the most appropriate GST strategies on your property developments.
1) Charging GST on a pre-existing residential premises
If you’re selling a pre-existing residence, so not a new build, but a pre-existing developed property, there shouldn’t be any GST charged for this sale. This is because the sale is considered as input-taxed supply.
Even if you’re registered for GST (which as a property developer, you most likely are), you’re not able to charge GST on an existing residential property. And similarly, if you’re buying a pre-existing residential property, you can’t claim a GST credit on the purchase either.
Charging GST on pre-existing residential premises is one of the most common GST mistakes that we see. This mistake can also be compounded further by the developer claiming GST credits for purchases involved in the sale of the property.
If the sale isn’t liable for GST, then you can’t claim GST credits on the property—it’s as simple as that.
However, this rule changes if part of the property contains a commercial element. GST is able to be proportionally charged for the commercial portion of the sale.
2) Claiming GST on a residential property incorrectly
If you’re renting out a property, this doesn’t automatically mean you can claim GST. Some property developers forget this.
GST doesn’t actually apply to residential rent.
This means that you’re not liable for GST on the rent you charge, nor can you claim GST credits on the expenses incurred while renting your property/s.
Even if you run another business that is registered for GST, you still can’t claim GST on anything involved with renting your residential property.
However, if you operate your property as a commercial residential property—so for example, you run a bed & breakfast (B&B), or you rent it out as an office space—in this circumstance you’re liable for GST. This is because it’s a commercial enterprise.
But for a simple residential rental situation, you can’t claim GST.
3) Forgetting about the GST Margin Scheme
The ATO’s GST Margin Scheme arrangement allows you to limit the amount of GST you’re required to pay on the sale of your property.
Under the scheme, you’re only required to pay GST on the profit margin of the sale of your property. So for example, if you buy the property for $500k, but then sell it for $720k, the profit margin is $220k. So, you’re only paying GST on this amount, which equates to $20k of GST you need to pay.
If you didn’t elect to use the Margin Scheme, you’d have to pay GST on the full sale amount of $720k, hitting you with an approximate $65k GST bill.
There are a number of ways to be eligible for the Scheme, which include:
- You bought the property prior to the new GST rules coming into effect on 1 July 2000.
- The buyer isn’t registered for GST.
- The seller of the property used the Margin Scheme themselves, when you bought it.
So before you decide to sell your property development, ensure you’re able to elect for the Margin Scheme. If not, you’re liable for a much larger GST bill.
If you forget about the Scheme or opt to take part in the Scheme during the sale, this can result in a painful, long-winded process that takes months to resolve.
4) Forgetting about the Sale of a Going Concern
This is a less common mistake than the others, but can still occur.
Generally as a property developer, selling a vacant residential property means you’re liable for GST on the sale.
But if the property is tenanted, it’s a different story. If you sell a property with an active tenanted lease on it, the lease is transferred to the buyer. This means you satisfy the criteria for being considered as a leasing enterprise. You’re essentially selling a property that’s making money—effectively a business enterprise—so you’re selling what’s known as a Going Concern.
This type of sale, the Sale of a Going Concern, is GST-free—only if both the buyer and the seller are registered for GST. You’re also required to agree upon this in writing in the sale contract for it to come into effect. If so, you won’t have to pay GST on the sale, and the buyer can claim a GST credit on the purchase.
However, this isn't a common scenario, and you should seek advice from an experienced property development accountant before making any decisions on this basis. You can guidance on this topic on the ATO's website.
5) Registering for GST when you don’t have to
Registering for GST means that you’re required to pay GST on all income you make related to that specific registration. So, if you register for GST without needing to, then you’re essentially giving away a portion of your income for no real reason.
As a property developer, you’re most likely required to register for GST if:
- The turnover from that property is set to reach or exceed the GST threshold of $75k; or
- You run your property development business in a commercial manner. That is, you buy property, then develop it in order to sell it on and make a profit.
However, you’re not required to register for GST if:
- You develop property then rent it out for residential rental; or
- You’re developing a property for private use (and may sell it at a later date).
A good rule of thumb is if you’re only developing for residential use, or a once-off private sale, then you’re not likely to need to register for GST.
6) Claiming GST by using the incorrect GST method
When you register for GST, you’re required to choose a specific GST method that determines when you can claim GST. These methods are known as Cash Basis and Accruals (Non-Cash) Basis.
Under a Cash Basis you pay GST, and can only claim GST credits when income is received, or payments have been physically paid, within that business activity statement period. So, this could be monthly, quarterly, or annually, depending on what you choose.
This is the more straightforward method of the two: you pay GST on the amount of income you physically receive, and you can claim GST credits on the purchases you make.
Under an Accruals Basis you pay GST on the amount you invoice during that business activity period. Claiming GST credits remains similar. However, you can also claim GST credits on any outstanding creditors you still need to pay, based on the date the bill was entered into your accounting software.
So for example, say you send an invoice in one BAS quarter, but receive the payment the quarter. In this instance, you pay GST in the quarter that you issued the invoice, not when it was received.
Regardless of which method you choose, it’s important to stick to it. The ATO are strict on claiming GST, particularly when it comes to property development.
We recommend using a robust accounting platform, like Xero, to track and manage your GST obligations, so you don’t get caught out.
It’s important to be aware too that some banks prefer property developers to be on a monthly GST cycle. This provides them with more certainty that the developer is going to pay their loan repayments regularly.
The final word
Understanding the GST implications for property development is a complex task, and one that’s critical to get right. If you don’t have the right strategies in place, or you don’t make the right decision, you could end up paying a hefty GST bill post-sale. Or, you could be missing out on a not-insignificant cost saving when purchasing your next property for development.
So make sure you’ve got the right adviser in your corner, right from the start, to ensure there are no mistakes on the horizon for your property development/s.