Property Tax Tips: Goods and Services Tax (GST) – building, renovating and developing property

The Goods and Services Tax (GST) was introduced in 2000 and aside from the obvious impact on regular businesses, it has also had an effect on the activity of property investors.

Last month we looked at the application of GST when buying, leasing and selling property. In this month’s edition of Property Wealth News, we’re going to answer some common questions about the role of GST when building, renovating or developing property.

Firstly, let’s recap a little from last month. The rules regarding GST registration stipulate that you MUST register and therefore charge GST and be able to claim back GST if you are running an enterprise and have an expected turnover of ‘taxable supplies’ in excess of $75,000 per year. What’s an enterprise and what’s a taxable supply will become clearer by answering the following common questions:

To build a house, do I need to be registered for GST?

Well, it depends on your intention. If you are building your own home to live in, that’s not considered an enterprise hence no need to register for GST. But if you are building to sell with an expectation of profit, then that would be considered an enterprise. In addition, if the new property for sale is residential, then that is considered a taxable supply (remember new residential properties are different to existing ones which are considered ‘input taxed’). And in reality, new builds are likely to have a turnover of more than $75,000 thus ticking all criteria for registration of GST.

If I’m building to sell and meet all criteria to be GST registered, what do I have to do once I am registered?

Upon construction of the property, you will be able to lodge a claim for the GST you have paid in developing the property. Upon the sale of the property, you will need to remit to the Australian Tax Office (ATO) the GST you collected from the sale. The GST paid may be based on the entire selling price, or you may be able to utilise the margin scheme for calculating GST. This allows you to only pay GST on the difference in price between the land purchase price and the final sale price.

I am intending on building a couple of residential units with the sole purpose of renting them out for income. What impact will the GST have for me?

Renting them out is not considered a ‘taxable supply’ so you would not need to register for GST. This means you will not have to pay out any GST, but also that you will not be able to claim back any GST on the building costs you incur. The ATO is however quite strict when it comes time to eventually sell them. If you sell within 5 years, bear in mind you will be liable to pay GST on the sale. But if you hold them for more than 5 years, you’ll be able to sell without needing to register or remit GST. By this stage, your property is no longer considered “new” in the eyes of the ATO and therefore is considered an ‘input taxed’ supply rather than a ‘taxable supply’.

I’ve built a few residential units which were built to sell, however I’ve had trouble finding buyers. For now, I’m renting them out. What happens in regards to the GST I’ve claimed so far?

This all depends on whether you are still actively trying to sell them. Generally, if you are still continuing to market and advertise the properties for sale whilst rented, then you will not need to pay back the GST you already claimed. But there will be a minor adjustment at the end of each financial year where you may need to pay just a small amount back. If however you cease actively marketing the properties for sale, you will have to pay back in full all the GST you claimed during construction.

I’m going through the process of renovating a residential property. Will I need to pay GST when it comes time to sell?

The issue of renovation has always been a bit of a grey area and as such the ATO has issued a number of rulings and guidelines for this area. The renovation project must be considered an ‘enterprise’ and must turnover in excess of $75,000 which is more than likely given the price of property these days. However, whether it is a ‘taxable supply’ depends on whether it would be deemed a ‘substantial renovation’ which would qualify the property as ‘new’ premises making is GST liable.

A substantial renovation is one in which all, or substantially all of a building is removed or replaced. Note that this does not mean that removal or replacement of walls, foundations, or the roof is necessary to be considered substantial. If it is just a ‘tart up’ with only cosmetic improvements such as painting or replacing carpets and window treatments, this would not generally be considered a substantial improvement thus GST would not likely be applicable. Generally speaking, a renovation involving some form of significant structural work may be considered a substantial renovation.  

As always, please consult your accountant before making any decision that may be impacted by GST, as your individual circumstances and the specific definitions of various aspects by the ATO may alter your decision.