One of the most important factors many people overlook when buying and selling property is the Goods and Services Tax (GST). The GST can affect your property sales, leases and purchases in a number of different ways depending on the type of property involved, as well as the current legislation and the method your accountant uses for calculating the GST.
2018/19 was the first financial year you can carry forward unused cap amounts. Unused cap amounts can be carried forward for up to five years.
It can all feel overwhelmingly complicated when you’re not an expert in Tax Law – so let’s simplify things!
The first thing we need to understand is that the GST will be different for each property type. There are three main property types:
- Commercial property
- Commercial residential premises
- Non-commercial residential premises.
Secondly, we need to know that the rules for purchasing new residential property and land have changed. As of July 1 2018, we are required to hold on to the GST from our property purchases, and pay it directly to the ATO. It seems a bit odd, but there is a very good reason for this!
And finally, we need to know about the Margin Scheme. In some situations, applying this scheme can result in better GST outcomes for the vendor.
Different GST for different property types
The sale or lease of a commercial property is typically considered a taxable supply. So as long as the supplier is registered (or required to be registered) for GST purposes, the GST will be included in the price.
It is possible for the registered supplier of a commercial property to be exempt from GST.
The property would need to be deemed a ‘going concern,’ which means the commercial premise is leased or sold with everything necessary for the current business to continue operating up to and beyond the date of sale.
When the commercial property is sold together with the business as a leasing enterprise with the existing lease in place, you may be eligible for this concession. Keep in mind that the ATO has a number of other conditions and requirements for GST exemption for commercial property. You can find everything you need to know in GST Ruling GSTR 2002/5.
Commercial residential premises
Selling, leasing or renting out commercial residential property can also be subject to GST if the supplier is required to be registered for GST.
To be considered a commercial residential property for GST purposes, there must be a commercial intention for the use of the premises. This will usually mean that services are provided at the premises, and that there are several unrelated occupants who are classified as guests. Think hotels, motels, and boarding accommodation.
For the nitty gritty on GST and commercial residential premises, see Goods and Services Tax Ruling GSTR 2012/6. If you’d like to know more about the GST implications for long-term accommodation in a commercial residential premises, check out Goods and Services Tax Ruling GSTR 2012/7. Alternatively, talk to a hands-on investor with over 20 years experience in property investment and the Real Estate industry.
Residential premises: Non-commercial
A transaction on a residential premise is usually input-taxed, which means there is no GST to pay. The exception to this rule is the transactions around brand new residential property and land, which will be covered below.
What constitutes a residential property goes beyond how the buyer intends to use the premises. This may come as a surprise, but the objective physical characteristics of the property need to be considered, rather than just the subjective intentions of the purchaser.
A property is subject to a residential lease at the time of sale.
However, the purchaser wants to develop the property into a commercial premises. As such, they feel the sale should be subject to GST.
Upon inspection, the premises is confirmed to have all the characteristics of a residential premise, rather than that of a commercial property.
So instead of applying GST, the sale is subject to input tax. You can find more details about how the ATO evaluates the residential status of a property here: Goods and Services Tax Ruling GSTR 2012/5. Otherwise, feel free to talk it through with one of our Gold Coast-based property tax specialists.
What is input tax? And can I claim credits?
If a residential premise is considered new, it is a taxable sale and GST is included in the price. When an existing residential premises is sold, however, GST is generally not included in the price. Instead, existing residential properties are input-taxed.
If you buy property with the intention of developing it and selling it at a profit, the ATO may view this as a business activity. To have your property-related purchases seen as a business activity, it’s important to have a valid commercial reason for any construction or renovations that you intend to carry out. In this case, you may be able to claim GST credits, regardless of whether you’re dealing with an existing property or a new one. If you’re unsure whether you fit into this category, have a chat with the business and property tax experts in Southport to get some clarity on your situation!
Remember: you must register for GST to claim GST credits!
When your property transactions are for private purposes, such as building or selling the family home, you are not ‘doing business’ in the eyes of the ATO. So, in the case of an existing residential property, you are not liable for GST on the sale. This also means you will not be able to claim GST credits for any purchases relating to the sale.
As for developers who intend to lease the new residential property they are building, there is also no legal entitlement to claim input tax credits on your construction expenses.
A property sale is input-taxed when the sales don’t include GST in the price. Although a property transaction will usually involve spending money (and paying GST) on various goods and services for preparing or renovating the property, you are not able to claim GST credits for the GST included in these ‘inputs’.
While it is possible to find ways to overcome these limitations, it can become very complicated and messy. To make matters worse, you may come head-to-head with the ATO’s general anti-avoidance tax rules.
Want to know more about lowering your risks and protecting yourself as a taxpayer? Get in touch with the Property Tax experts at ABA Tax for an obligation-free chat today!
New residential premises
As mentioned above, the sale of a new residential premise is considered a taxable sale, and GST will be included in the price.
A new residential premises is a residential property that meets any of the following three conditions:
- The property has not previously been sold (or subject to a long term lease) as residential premises.
- The property has been created through substantial renovations. However, new residential premises of this kind are excluded from the withholding obligation.
- New buildings which have been built to replace demolished buildings on the same land.
Residential premises are no longer considered ‘new residential premises’ if they have been used solely for renting for 5 or more years since they were built.
Buying new residential premises or land? There are new GST rules!
The purchaser’s new responsibility
As of July 1st 2018, it will be the purchaser’s responsibility to withhold the GST on the price of a new residential premises, and remit this directly to the ATO as part of the settlement process. This applies when you purchase a newly built residential premises, or a new subdivision of vacant land. However, this legislation does not apply to new premises arising from substantial renovations or commercial residential premises.
If the purchase price is to be paid in instalments, the buyer must remit the GST to the ATO on the day the first official instalment after the deposit. The purchaser is required to withhold and remit either 1/11th or 7% of the total price, depending on the agreed method for calculating GST.
Written notice is required
The vendor is required to give the purchaser a written notice prior advising them of this obligation prior to the sale. This notice must include the supplier’s name and ABN, the amount payable, and the date the payment needs to be made to the ATO.
Note: Vendors are also required to provide a written notice to purchasers of input-taxed existing residential premises.
The reason behind these new rules
Although it might just seem like extra paperwork, there is a very good reason behind this new law. According to the ATO, a number of developers have been accepting a purchase price that includes GST at settlement, but dissolving their development company before remitting the GST to the ATO and creating a new company for their next development.
This has resulted in $1.8 billion in debt between 2012 and 2017, which was written off in November 2017. The insolvent entities also claimed $1.2 billion in GST input tax credits between 2013 and 2017. The ATO found 3731 individuals to be in control of 12,000 insolvent entities during this period. One example is a Sydney man, who will spend six years in jail and pay $1.8 million in reparations after being convicted of tax fraud.
Receiving GST payments directly from the purchaser instead of the vendor will now prevent these huge debts and criminal convictions from occurring in the future.
Penalties for non-compliance
If the purchaser fails to withhold and pay the required amount to the ATO, they will be liable to a penalty equal to the amount of GST they owe. However, a penalty will not be applied if the purchaser has received a notice from the vendor which states that they are not required to withhold GST.
If you’re about to buy or sell a property and would like a more in-depth explanation of these new rules and how to protect yourself from ATO penalties, get in touch with a property tax and legal specialist today!
The Margin Scheme – and how can it help you as a vendor.
There are a couple of different methods your accountant may use to calculate the GST liability on your property sale. One of these methods is known as the Margin Scheme, which calculates GST on the difference (or margin) between the price you receive from the purchaser, and what it cost you to acquire the property.
Generally speaking, the Margin Scheme will result in a better GST outcome for the vendor. The difficult part is that this scheme may seem less attractive to the purchaser, as they will not be able to claim any input tax credits for the GST included in the purchase price. If you wish to use the Margin Scheme, you must have a written agreement with the purchaser to do so.
If the Margin Scheme is applied, the purchaser must withhold 7% of the contract price regardless of the your margin GST liability. Any settlement adjustments must be taken into account when determining the total amount received for the sale.
If the Margin Scheme is not used, the purchaser must withhold 1/11th of the contract price. This does not include any adjustments that may arise, such as land tax, council rates and water rates.
- Your accountant will show any reconciliation on your next Business Activity Statement.
- The Margin Scheme cannot be used if you paid the full rate of GST when you originally purchased the property.
- If your property was originally purchased before July 1st 2000, your margin will be calculate based on an approved valuation at this date, rather than on your acquisition cost.
We hope you now have a much clearer understanding of how the GST is involved in property transactions, so that you are able to use your knowledge to improve your financial position. Please don’t hesitate to get in touch if you’d like any further clarification on this topic – we are always available for a chat!