Time to read : 4 Minutes
If you're thinking of taking on the role of a property developer – that is, you’re looking to build a home on the land you own – whether or not you use contractors, there are GST rules to know about.
This is particularly important if you’ve never developed a property before and don’t intend to do so again. Perhaps you have surplus land and you’re considering subdividing a large block which has your main residence on it, to build a house... or even several houses, or an apartment block.
While this is strictly not a business, it’s regarded by the ATO as an “isolated profit-making transaction”, which translates to it being an enterprise. And an individual carrying on an enterprise must register for GST.
As the Director of Tax Communications at H&R Block, I often talk to owner-builders who do not know about their obligations. So let’s take a closer look at what all this boils down to.
Once registered for GST, what are the other consequences for an owner-builder?
Claiming tax credits
You can claim input tax credits, in other words you can get back the GST on any expenses which relate to the build.
This could include:
legal and professional fees
materials
contracted labour
sales and marketing fees.
The sale of the resulting property that you build will be subject to GST. This will normally be payable on the sale of the property, calculated at 1/11th of the GST-inclusive sale price of the property.
Note: most purchasers will be required to pay a withholding amount from the contract price at the date of settlement. This means that part of the sale proceeds will be withheld and sent straight to the ATO, so the vendor of the land will only receive the net amount.
What’s interesting is that the sale of residential premises generally does not attract GST. But the sale of new residential premises is subject to GST.
What classifies as a new residential premises?
The definition of new residential premises includes any building that:
has not previously been sold as residential premises, or
the building replaces a previously demolished building on the same land
is an existing building but substantial renovations have been carried out to it.
What’s considered as 'substantial' renovations?
Substantial renovations include more than just giving the existing building a lick of paint or a new kitchen. It’s defined to include renovations in which all, or substantially all, of a building is removed or replaced.
Factors that demonstrate substantial renovation include:
The increase in market value of the building after the renovations.
The amount spent on the renovations.
The requirement to obtain building alteration approvals.
The requirement to obtain rezoning approvals.
A change in council rate classification.
The sale of new residential premises will not be subject to GST, where the premises are rented continuously for five years post-development.
So if you have built a property and claimed GST credits, but then decide to rent it out, you will be required to make an adjustment to the amount of GST credits claimed – this is an increasing adjustment.
Be aware: this could involve having to repay some or all the GST credits you have claimed on the building expenses.
Important: in certain circumstances, you may be able to apply the margin scheme to the sale of the building. GST is payable on 1/11th of the ‘margin’, rather than the GST-inclusive sale price.
💡 The ‘margin’ is generally the amount by which the GST-inclusive sale price exceeds the original cost of the property. There are a number of situations where the margin scheme could apply but the most common, in this context, is where you originally bought the property from someone who wasn’t registered for GST (such as a person who sold their main residence).
Bottom line
As a taxpayer, if you do decide to do a one-off property development, such as subdividing land or building a new property, be sure you register for GST. You’ll be able to claim GST credits for building costs like materials and professional fees.
Keep in mind that:
GST will need to be paid on the sale of the newly developed property, calculated as 1/11th of the sale price.
GST usually won’t apply to residential property sales unless the property is classified as a new residential premises including newly built, substantially renovated, or replacement properties.
If rented out for five years after the development, GST may not apply to the sale, but you’ll be required to repay previously claimed GST credits.
ATO requirements can be tricky so talk to a professional before you get started on your property development.
Go deeper:
Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
