For a property developer, managing GST obligations forms a key part of your property development project. Hence, it is important that you do it right from the outset.
Currently, you must register for GST if any of the following applies:
- your business income exceeds or is likely to exceed $75,000 in a financial year
- you develop land with the intention to sell it for a profit (as ATO may view it as you being “in the business” of property development)
A GST-registered entity is obliged to charge 10% on top of the sale price of the property sold after developing it.
Being a property developer, it is most likely that you are required to be registered for GST.
What does it mean by being “in the business” of property development?
ATO considers the following factors when it determines whether you are in the business of property development:
- constantly buying, renovating and selling properties in order to make a profit
- the length of time you have held onto the land
- whether the property was your family home
- whether the land has previously been developed
- your intention at the time of purchasing the land
When should you register for GST?
You can register for GST:
- when you sell your properties, or
- when you commence your project.
If you register for GST when you commence a project, you can probably claim GST credits on your costs through the project’s lifetime. These costs include building costs, land acquisition costs etc. These credits can be used to offset the GST you have to pay.
As a developer, it is not unusual for you to acquire the development site from individuals selling their family homes. No GST would be included in those sales because they are sales of existing residential properties. Naturally, the sellers are not registered for GST and you cannot claim GST on the purchase, however, you are still required to pay GST on the sale of the developed property.
If this happens, there are 2 main strategies you can use to avoid paying GST on your property developments:
- Margin Scheme; and
- Sale of a Going Concern.
Margin scheme is an effective way to minimise your GST payable to the ATO.
Under the margin scheme, ATO only requires you to pay GST on the profit margin of the sale.
You bought a property for $1,000,000 from a couple who are moving overseas. You develop the property, and then sell it for $2,100,000.
Your profit margin is effectively $1,100,000. Under the margin scheme, it means you need to pay GST of $100,000 (being 1/11 * $1,100,000).
If no margin scheme was used, you need to pay GST on the whole sale price, which is $190,909.09 (being 1/11 * $2,100,000).
The savings on GST could be just over $90,000.
When can you use margin scheme?
You are likely to be eligible for margin scheme if any one of the following applies:
- you bought the development site prior to 1 July 2000 (this is when the GST legislation first came into effect)
- if you bought the development site on or after 1 July 2000:
o where the vendor of that development site was not registered, or required to be registered, for GST
o property was sold as an existing residential premise
o property was sold as a going concern
o property was sold as a GST free farmland, or
o property was sold to you using margin scheme
Before margin scheme applies:
- both you and the buyer must agree for the margin scheme to apply
- from 29 June 2005, the written agreement must be noted on the contract on or before settlement
- the agreement to apply the margin scheme cannot be revoked after settlement (see ATO ID 2010/83)
Sale of a Going Concern
In property development, sale of a going concern means sale of a property that is currently leased to an existing tenant.
If it is a going concern, then the sale is free from GST.
However, the down side of this is that you are limited in your ability to claim GST credits.
You bought a vacant land and built 10 townhouses on it.
You then sold them for $1,000,000 each.
Normally, sale of these vacant townhouses would include GST. It means the total sale price would be $1,100,000. ($1,000,000 plus $100,000 GST).
However, if these townhouses were leased out to tenants after construction.
When selling these tenanted properties, the leases were also transferred to the buyer. Then this means that you sold them as a going concern.
Before you can apply for this exemption:
- both you and the buyer must be registered for GST; and
- both of you must agree and note it on the contract.
In this case, the price remains at $1,000,000.
If you want to sell as a going concern, it is critical to seek the right tax advice. ATO is known to challenge these types of exemptions, and if you fail the challenge, then you are required to pay the GST regardless.
Having a sound strategy in place from the start of your development is likely to benefit you in the long run.
Division 75 of the New Tax System (Goods and Service Tax) Act 1999 (GST Act)
ATO ID 2010/83
*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*
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