Property Developments and GST
In theApril edition our Subdivide and Conquer article discussed some income tax consequences that arise when subdividing your property.
Property developments and GSTexplores thetypical GST consequences when doing your own suburban development such as buying an old house, demolishing a property, subdividing the land, constructing units on the land and selling or leasing out the units.
Your greatest GST risks with such developments can include:
- Costs associated with unexpected GST liability; or
- You may not be eligible to claim the GST on your building costs
Your situation all boils down to whether:
(a)You conduct the development in the course of an enterprise that you are carrying on; and
(b) If you are carrying on an enterprise, whether your original intention was to make a taxable supply (e.g. sale of new residential units) or an input supply (e.g. leasing out of new residential units)
Your development will not have any GST implications unless it is done in the course of carrying on an enterprise. If you are not carrying on an enterprise, then any sale of the developed property cannot be subject to GST.
Whether or not you are carrying on an enterprise is a question of fact. For example, where an existing owner of land simply sub-divides the land into 2 titles and sells those titles to a developer, which by itself may not be sufficient for that person to be seen to be carrying on an enterprise. However, it is the ATO’s view that where you purchase an existing property, demolish, subdivide, build new units and sell them with the intention of making a profit, you will be carrying on an enterprise and will therefore have GST issues to think out in relation to the development.
The remainder of this article proceeds on the basis that the proposed development is done in the course of carrying on an enterprise and the developer is therefore required to be registered for GST.
Original intention was to sell the units
What will your GST liability be if your original intention was to sell the units?
The first sale of newly built residential units is subject to GST (taxable supply).
As such, you will have a GST liability when you sell those units. You will have a GST liability regardless of whether or not you are already registered for GST provided your expected sales revenue is likely to exceed $75,000 in any period of 12 months. The GST liability will usually be 1/11th of the sale price although there can be variations to this.
TIP: To minimise your GST exposure, you may be able to use the margin scheme to calculate the GST payable on this transaction, provided there is a written agreement between yourself and the purchasers of the units that the margin scheme will apply to the sale of these units. This is because under the margin scheme, GST is only payable on the difference between the sale price and the cost price, instead of on the total sale price.
Can you claim the GST on constructions costs if your intention was to sell the units?
Yes, because you intended to sell the units on completion (taxable supply), you are entitled to claim input tax credits for the GST payable on the construction costs, provided you are registered for GST.
Original intention was to lease out the units
What will your GST liability be if your original intention was to lease out the units?
If you only intended to lease the newly constructed units out (and not sell them), the income derived from leasing the newly built units will not be subject to GST. This is because the leasing of newly built residential units is an input taxed supply.
Can you claim the GST on your constructions costs if your intention was to lease out the units?
No, you will not be able to claim input tax credits for the GST payable on the construction costs because your intention while you were building was to lease out the units, which is an input taxed supply.
Last words on GST?
It is clear that before embarking on your property development project, it is absolutely essential to consider the GST implications as this could ultimately be the difference between deriving a profit or loss on a project.
As such it is important to determine and, where appropriate, to document the following:
1)Enterprise are you carrying on an enterprise which requires you to be registered for GST;
2)Intention - What do you plan to do with the units after they are built (i.e. are you going to sell or are you going to lease); and
3) Actual application - Whether you end up leasing or selling the units (or whether you do both).
This article only covers the situation where you build and sell or lease out new residential units.Different GST rules apply to commercial and other non-residential property.
DISCLAIMER:Pitcher Partners is an association of independent firms. This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.