When it comes to property developing, GST considerations are almost always present. The GST rules require you to register for GST if your annual turnover in the past twelve months or projected annual turnover in the next twelve months exceeds $75,000 at any point in time. Furthermore, you may want to voluntarily register so that you are able to claim back the GST on costs incurred on your development project.
Importantly, GST will still be relevant even if you fail to register, as the tax applies as soon as you are required to be registered for GST, regardless of whether you are undertaking a one-off development project or carrying on a recurring property development business.
This may come as a surprise to those who have only owned residential properties and not undertaken property development in the past, because renting out residential premises and selling second-hand residential premises is ‘input taxed’ and the proceeds from these activities are not counted towards annual turnover or projected annual turnover.
Even if they are registered for GST or required to be registered for GST, the rent or capital proceeds on sale from these activities themselves do not attract GST as they are input-taxed supplies.
Buying the property
If you are developing commercial property or new residential premises for the purpose of resale, your original acquisition of the property for development (which includes both vacant land and land with existing buildings and improvements) will normally be a ‘creditable acquisition’ and you would be entitled to claim back the GST on the purchase if the property is sold to you as a ‘taxable supply’.
What this means is that if you are buying the property from a seller that is neither registered for GST nor required to be registered for GST, their sale of the property to you will not be a taxable supply. Therefore, you will not be able to claim back any GST on the acquisition.
Similarly, if the property is sold to you as an input-taxed supply or GST-free supply, you will not be entitled to any GST claim.
For example, if a seller who is registered for GST is selling a second-hand house to you, the sale will be an input-taxed supply, which does not attract GST. As the seller is not liable for GST on the sale of the property, you as the buyer will not be entitled to claim back the GST on your purchase.
Alternatively, if the seller is selling the property to you under the ‘margin scheme’ or as a ‘supply of a going concern’ (both discussed further below), you will also not be able to claim back any GST on the purchase of the property for your development project.
Developing the property
As a developer, you are generally entitled to claim back all of the GST included in the costs of developing a property – e.g. architects’ fees, consultants’ fees, construction costs – provided that you will be using the property solely for the purpose of making taxable supplies in the future. For instance, if you are developing and selling a commercial property or new residential premises (which includes substantially renovated second-hand residential premises), you will be using the property for the sole purpose of making a taxable supply.
For a commercial property loan, on the other hand, if you are solely making input-taxed supplies (for example you are selling second-hand residential premises without substantially redeveloping them), you will not be entitled to claim back the GST on costs associated with the property.
It is worth noting that residential premises you own are still considered ‘new’ if you have developed the property as new residential premises and rented it out for less than five years. Therefore, if you sell the property before this five-year limit, the sale of the property will still be treated as the supply of new residential premises.
Even so, you are also taken to be making input-taxed supplies during the period in which you are renting out the property. Therefore the property is considered to have been used for multiple purposes and is attributable to multiple types of supply for GST purposes.
Accordingly, in this situation, you will be required to pay back some of the GST you have previously claimed on the costs of acquiring and developing the property to account for the fact that the property has been partially used to make input-taxed supplies (i.e. rented out as residential premises) and partially used to make taxable supplies (i.e. the sale of new residential premises).
The apportionment calculations and determination of the timing of paying back the GST may not be straightforward, which is why professional advice is strongly recommended.
Selling the property
If you are selling a commercial property or new residential premises (including off-the-plan sales) and you are registered for GST or are required to be registered for GST, you will be making a taxable supply and will generally be liable for GST on the sale of the property as a default position.
The GST is usually calculated as 1/11th of the GST-inclusive sale price of the property. However, this may change if you are selling the property under the margin scheme or as a supply of a going concern.
You may be eligible to apply the ‘margin scheme’ to reduce your GST liability if a number of conditions are met. In any case, you must agree in writing with the buyer that the margin scheme will apply. The way in which you originally acquired the property and the timing of your acquisition will be relevant in determining your eligibility to apply the margin scheme.
Generally, you will be eligible if one of the following applies to you:
- you originally acquired the property before 1 July 2000;
- you originally acquired the property through a taxable supply under which the margin scheme was utilised; or
- you did not originally acquire the property though a taxable supply, for example you acquired the property from an entity that was not registered for GST (or required to be registered for GST), you acquired the property under a supply of a going concern (refer to below), or you acquired the property under an input-taxed supply.
Under the margin scheme, you are required to pay GST on 1/11th of the ‘margin’, rather than the GST-inclusive sale price, which is generally the amount by which the GST-inclusive sale price exceeds the original cost of the property. However, the original cost does not include any costs incurred on the property subsequent to its original acquisition, for instance construction costs of a new building on the land.
- If the GST-inclusive sale price of the property is $1,100,000, and you bought the property for $660,000:
- your GST liability would normally be $1,100,000 x 1/11th = $100,000
- If the margin scheme applies, your GST liability will be reduced:
- the margin calculation is $1,100,000 – $660,000 = $440,000
- $440,000 x 1/11th = $40,000
The original cost of the property for this calculation may be modified in some circumstances. For instance, if you originally bought the property through a GST-free supply from a related party or deceased estate, the original cost of the property for the purpose of calculating the margin under the margin scheme may not be the original cost you incurred to acquire the property. Therefore professional advice is strongly advisable to ensure that you are calculating the margin correctly.
It is also important to note the effect of the margin scheme on the buyer. If the margin scheme applies, the buyer is not allowed to claim any GST back on the purchase. Therefore, if the buyer would have been entitled to claim the GST, but for the margin scheme (for example you are selling vacant land that will be used by the buyer to develop and sell commercial property or new residential premises), they may be reluctant to enter into a margin scheme agreement with you as the agreement would prevent them from claiming the GST back on the purchase of the property, thereby increasing the cost and reducing their financial return on the project.
Supply of a going concern
Generally speaking, if you sell commercial property and new residential premises in vacant possession, you will be liable for GST on the sale. However, if you have leased the property to a tenant, continue to lease the property up to the time of settlement, and assign the lease to the buyer as part of the sale of the property, you will be taken to have supplied all the things that are necessary for the continuation of a ‘leasing enterprise’. As such the sale of the property may qualify as a ‘supply of a going concern’, which is GST-free, i.e. you will not be liable for GST on the sale.
For this GST-free treatment to apply, both the seller and buyer must be registered for GST and they must agree in writing that the sale will be a supply of a going concern.
As mentioned above, if you have claimed GST on the acquisition of the property (for example because you developed it) but you lease the property out as residential premises before it is sold, you will be required to pay back some of the GST included in the costs incurred on your original acquisition and development of the property to reflect the fact that the property has been partially used to make input-taxed supplies and taxable supplies.
Naturally, the buyer will not be able to claim any GST on the purchase of the property if the GST-free treatment applies, as you will not be liable for GST as the seller, even if the buyer would otherwise have been entitled to claim back the GST on the purchase.
One word of caution in relation to using the ‘supply of a going concern’ GST-free treatment: given that the GST liability on a taxable supply is imposed on the supplier, if you sell a property as a supply of a going concern, you bear the risk that if you are subsequently challenged by the ATO and it is held that the sale did not qualify for the GST-free treatment, you will become legally liable for the GST on the sale.
To mitigate this risk, you should ensure that an appropriate GST recovery clause be included in the contract for the sale of your property, which will enable you to recover from the buyer any GST (ideally including any potential penalties and general interest charges) for which you subsequently become liable.
However, it should be noted that this contractual provision will only be as good as the financial position of the buyer at the time when it is invoked. If the buyer no longer has the financial capacity to fulfil their obligations, the GST recovery clause may not be of much use to you and you will still be legally liable for the GST.