If you are selling or purchasing real estate you need to give consideration to any Goods and Services Tax (GST) implications involved in the transaction as the GST laws in regards to property can get complex very quickly.
Selling Residential property
If you are selling residential property then generally sales owned by private persons will not attract GST, even if the property is an investment.
GST may however apply if you run a business, are registered for GST or required to be registered and the property is considered a business asset. This could be the case for example if:
- You provide accommodation and rent out the property out for holiday/short term rental; and
- You are a builder or developer and are selling a property that you have developed as part of your business
Selling Commercial property
If you own a commercial property and are registered or required to be registered for GST it is likely that the sale will be subject to GST.
The sale will be exempt from the Goods and Services Tax if you have one or several tenants in the property and the Purchaser takes over the leases, but only if the Purchaser is also registered for GST by settlement. This is called a ‘going concern’.
Selling Farming property
If you are a farmer and are registered or required to be registered for GST and you sell part or all or your farm land, GST will apply. The sale will however be exempt from the Goods and Services Tax if you have been using the land for farming for at least the last five years and the Purchaser intends to continue farming the land after settlement. For this exemption to apply the Purchaser does not need to be registered for GST.
What is the Margin Scheme?
Under certain conditions you can elect to apply the Margin Scheme to the sale of a property you have developed. This means you will only need to pay GST on the ‘margin’, i.e. the difference between the costs of purchasing and developing the land and the sale price. The GST law around the Margin Scheme is complex and documentation and timing is critical, so speak to Blue Dragon Business Services about the tax consequences and the Margin Scheme.
Considerations for the Purchaser
A property being purchased is sold ‘plus GST’
This means you will need to pay an additional 10% over and above the purchase price at settlement, provided the Vendor gives you a tax invoice for the price plus GST.
You will also need to pay stamp duty and land transfer fees on the purchase price plus GST, which will increase your overall cost of the purchase. You need to factor this in when you negotiate the price or apply for a loan.
If you are registered for GST at the time of settlement you will be able to claim the GST back once you lodge your BAS statement.
The property is sold as a ‘going concern’ or a ‘farming business’
If you are buying a property that is sold as a ‘going concern’ it is your responsibility to be or become registered for GST before settlement. If you’re not registered for GST by settlement and the Vendor is then charged GST by the ATO you will have to reimburse the Vendor for the GST paid.
On the other hand, if you are buying a property that is sold as a ‘farming business’ you will not need to be registered for GST, but you will need to meet the criteria of a ‘farming business’ for income tax purposes after settlement. Speak to your accountant about the requirements if you are buying farm land.
GST withholding regime
If you enter into a Contract for the sale or purchase of an ‘off-the-plan’ property after 1 July 2018 or have already entered into a Contract, but settlement takes place after 1 July 2020 this new regime will apply to your transaction.
From 1 July 2018 solicitors and conveyancers acting for Purchasers of off-the-plan properties will effectively become tax collectors, as they will need to withhold the Goods and Services Tax payable on the sale and pay it to the ATO at or immediately after settlement.
If the Purchaser’s representative fails to withhold these funds ATO can demand payment thereof from the Purchaser after settlement.
The GST withholding regime was introduced to try and prevent the practice of ‘phoenixing’. In the past, developers sometimes set up a company for the purpose of completing one specific development. As soon as the development was finished and the settlements had been completed, but before the next BAS statement was due, all the assets of the company would then be moved and the company wound up, with no GST remitted to ATO.
So, if you are selling off-the-plan land bear in mind that you will no longer have the benefit of the GST component of the purchase price between settlement occurring and your BAS statement being due.
If you are buying off-the-plan land and your final statement from your solicitor or conveyancer shows GST, even though your purchase was GST inclusive, this does not mean you paid the GST on behalf of the Vendor. It simply means that part of the money payable by you under the contract is paid to the ATO instead of to the Vendor.
If you have further questions about Goods & Services Tax and Real Estate, contact Michael Hamilton at Blue Dragon Business Services.
Blue Dragon Business Services are tax agents located in Cooroy, in the heart of Noosa Hinterland. We service all areas of the Sunshine Coast and South-East Queensland including Brisbane, Gympie, Ipswich and Logan for tax, BAS and bookkeeping. We also practice as virtual CFOs, take on interim CFO engagements as well as financial management, reengineering and restructures including business turnarounds, transformations and expert financial modelling.
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E: michael@bluedragongroup.com.au
P: 07 5412 7111
