As a property developer, managing your GST obligations forms a large part of your property development planning. So it’s important that you get it right from the start.
Liston Newton Advisory is here to help you plan for your future. To discuss the ins and outs of GST and your property development speak to one of our tax minimisation team members.
A quick look at the current GST laws
How to register for GST
Under current GST laws, both business entities and individuals must register for GST once it becomes apparent their income is going to hit or exceed $75k in that financial year. So, as it’s highly likely your property development will exceed this threshold, property developers should register for GST, too. Once you've reached the threshold, all your property sales should include GST, which you'll need to submit to the ATO as part of your regular BAS payment.
Registering for GST can occur either when it comes time to sell or, most often, at the start of the project. Registering at the start of the project means you can claim GST credits on applicable costs throughout the project’s lifetime. This includes things like building costs, planning, land purchase, etc.
GST exemptions for property developments
Any existing GST exemptions for private property sales generally won’t be applicable when developing a property. This is because the newly developed property is legally considered a ‘new premises’, which, per GST legislation, makes the sale a taxable supply, meaning GST applies to the sale.
Paying GST on commercial properties
You will have to pay GST on the sale of a commercial property. However, you can claim GST credits on anything you spend related to the sale — your real estate agent’s fees, for example. When selling a commercial property (such as a business site) or commercial residential property (such as a hotel), you can do so under a margin scheme or as part of a going concern. We cover both of these strategies below.
You will not have to pay GST if you are selling farmland. However, there are two conditions:
- The land was used for farming for five years before your sale
- The buyer of the land intends to use it for farming purposes
All the fixtures of the farmland (including residential properties and work structures such as shearing sheds and fences) are included in the GST-free sale.
Paying GST on investment properties
You do not have to pay GST on investment property sales. When it comes to the sale of residential property, GST is only applicable on the sale of newly built or redeveloped properties.
Paying GST on residential properties
If you are selling or buying an existing residential property, such as a home or apartment, you do not have to pay GST on that sale. Nor can you claim any GST credits for purchases made to facilitate that sale, such as estate agent fees.
If the property you’re selling is used for both residential and commercial purposes, then you will be liable to pay a proportional amount of GST for the commercial property sale.
Paying GST on vacant land
You must pay GST on the sale of vacant land, as unused land is not considered residential or commercial property, even if development is the intent of the sale. It is possible to use the margin scheme to curtail the GST owed, and our financial experts can guide you through this process.
Often, the seller won’t be registered for GST when buying a property to develop. This is generally the case, as the majority of property sales come from individuals selling their family homes. In these cases, no GST is included in the sale price.
In this case, there’s a GST mismatch. The seller isn’t registered for GST, so you can’t claim GST on the purchase—but you’re still required to pay GST on the sale of the developed property.
If this is the case, you can use two main strategies to avoid paying GST on your property developments: the margin scheme and sale of a going concern.
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The margin scheme
The margin scheme is an alternative way of working out your GST obligations. Under the margin scheme, the ATO only requires you to pay GST on the profit margin of the sale.
This means it’s particularly useful when buying property from a source that isn’t registered for GST.
Margin scheme eligibility
You’re likely to be eligible for the Margin Scheme if you purchased the property prior to 1 July 2000 (the date the current GST legislation came into effect).
If you bought the property after this date, you may still be eligible for the margin scheme if any of the following applies to the seller of the property:
- They are not registered, or required to be registered, for GST;
- The sale of the property was of an existing residential premises (in which case, GST doesn’t apply);
- The property was sold as a going concern (more on this below); or
- They sold the property to you, and elected to use the margin scheme themselves.
Once confirmed that you’re eligible for the margin scheme, you must also ensure that your potential buyer is willing to participate in the scheme too. This will have a flow-on effect for their business operations, so it's not always a guarantee that every buyer will want to participate in the Scheme.
You buy a property for $500k from a couple who are moving interstate. You develop the property, and then sell it for $720k.
You’ve effectively made a $220k margin on the sale of the property, so therefore you would only pay GST on the $220k profit. Calculating the GST on this (1/11th of $220k), means you’ll only pay $20k in GST under the margin scheme.
If you didn't use the margin scheme, you'd be liable for GST on the entire sale price. This means you'd be paying $65,454 ( 1/11th of $720K ).
Sale of a going concern
A ‘going concern’ is generally defined as a business that’s currently running and making a profit. So, in the context of property development, the sale of a going concern is the sale of residential property, including houses, units, flats and more. It refers to residential property that provides shelter and contains basic living facilities. It doesn't include vacant land.
A property is a residential property if it can be occupied, is occupied, or is intended to be occupied as a residence or for residential accommodation, regardless of the length of occupation. This is considered a GST-free sale, so you typically should be able to avoid GST when the time comes to sell. However, the other side of this is that you’re also limited in your ability to claim GST credits—so keep this in mind.
For a residential property to be considered a sale of a going concern, it must be fully tenanted and the sale must include all agreements and leases made with the tenants. If it is only partially tenanted (as an apartment might be), you must be actively trying to fill the vacancies at the time of the sale, or provide a legitimate reason why they cannot be filled (such as ongoing renovations).
For the sale of a going concern to be considered GST-free, it must meet the three following criteria:
- The buyer and seller must have a written agreement of the sale of a going concern
- The buyer is registered for GST
- The sale is made for payment
You develop a vacant property and build four townhouses on it, and sell them for $650k each. Under normal circumstances, the sale of these vacant townhouses would include a GST portion, which would be considered a taxable sale. Adding GST to the sale price makes the total sale $715k (650k plus $65k GST).
However, the situation changes if you lease these townhouses out to tenants after construction and then sell them. When selling a tenanted property, the lease also transfers to the buyer—so you’re selling a going concern.
In this case, if both you and the buyer are registered for GST, you can apply for this exemption. It must be agreed upon and noted in the sale contract. In this circumstance, you don’t need to add GST to the sale, and the price can remain at $650k.
An important note on the sale of a going concern
When making a sale of a going concern, it’s critical to get the right tax advice. The ATO is known to contest applications for this type of exemption, and if you lose the application, you’re required to pay the GST portion regardless. And, generally, there’s no recourse to approach the buyer for additional GST that’s not included in the original sale price.
So make sure that you and your tax adviser are 100% certain that you’re selling a going concern.
The final word
The world of GST can be complex, and it isn’t something you can skim over. If you’re looking for quick-and-dirty ways to avoid paying GST on property development, then you’re out of luck.
In order to limit paying GST on your property development, it’s crucial that you get the right advice. Having a robust strategy in place from the outset of your development can save you thousands in the long run.
So make sure you do your research, and take the time to talk things through with your adviser first. They’ll be able to help you understand all your options, and ensure you keep adequate records to correctly calculate your GST liability when it comes time to sell.