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. Contact us today to discuss the ins and outs of GST and your property development.
A quick look at the current GST laws
Registering 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 is going to exceed this threshold, this means that 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 then 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 through 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 property is legally considered a ‘new premises’, which as per GST legislation makes the sale a taxable supply, and therefore means GST applies to the sale.
Often when buying a property to develop, the seller won’t be registered for GST. This is generally the case, as the majority of property sales come from individuals selling their family home. 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, there are two main strategies you can employ to avoid paying GST on your property developments: the Margin Scheme, and Sale of a Going Concern.
The Margin Scheme
If you’re trying to avoid paying GST on your property development, the Margin Scheme is an effective way to minimise the amount of GST you’re likely to pay.
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.
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), this 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 ).
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.
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 a property that’s currently leased to an existing tenant, business, or otherwise.
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.
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, if you lease these townhouses out to tenants after construction and then sell them, the situation changes. 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
When making a Sale of a Going Concern, it’s critical to get the right financial 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 financial adviser are 100% certain that you’re selling a going concern.
The final word
The world of GST can be complex, and isn’t something you can skim over. If you’re looking for quick-and-dirty ways to avoid paying GST on a 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 financial 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.