FocusOn - GST and Real Property Transactions

It has been 10 years since the introduction of GST, yet the GST treatment of real property transactions remains one of the most complicated areas in GST law.  Many people still fail to apply GST correctly on real property transactions. Inadequate GST clauses in contracts give rise to disputes between vendors and purchasers.  This FocusOn attempts to outline some general GST issues involving real property transactions.

Generally, GST applies to Australian real properties supplied by entities that are or should be registered for GST.  Here are some basic GST considerations when selling real properties:

	Is the transaction in relation to an enterprise?  Is that enterprise required to be registered for GST?
	Is the transaction eligible for any GST exemption?
	If the sale is subject to GST, can the margin scheme apply?  How is GST worked out under the margin scheme?

An entity that is registered for GST will also need to consider GST implications when buying and holding real properties.

You may need to register

The first pitfall when applying GST law in respect of real property transactions is the identification of an enterprise.

‘Carrying on an enterprise’ is defined more widely than ‘carrying on a business’ and may include:

	A development business
	An isolated or once-off property transaction
	Leasing of commercial property

This does not mean every property transaction amounts to an ‘enterprise’.  Selling your home is generally a private transaction and not subject to GST.  However, if you undertake a subdivision, the subdivision can potentially be considered ‘carrying on an enterprise’.

Even if you are held to be carrying on an enterprise, you are only required to be registered for GST if your GST turnover is $75,000 or more ($150,000 for non-profit organisations).  In many instances, the proceeds from real property transactions are included in calculating the entity’s GST turnover.

It is important to consider carefully the issues of ‘carrying on an enterprise’ and registration prior to engaging in any real property transactions or development activities as the GST implications can be far-reaching.

Exempt from GST

The next step is to determine whether the real property transaction is exempt from GST.  In order to do that you need to consider:

	the type of property being supplied and
	the use of the property.

Supplies that are input taxed or GST-free are exempt from GST.  Supplies of real properties that are input taxed are:

	Residential rent
	Sale of residential property (excluding new residential premises or commercial residential premises)
	Supply of long term commercial residential accommodation where an election has been made to treat it as an input taxed supply.

Residential premises are exempt from GST to the extent that they are to be used predominantly for residential purposes.  Therefore, if part of a property has been converted for commercial use, that part of the property may be subject to GST.

Supplies of real properties that are GST-free are:

	Sale of real property that forms part of a going concern
	Sale of farmland which meets the farmland exemption requirements
	Sale or rent of real property by charities where the supply meets the non-commercial activities requirements.

Unless an exemption applies or the supplier is not required to be registered for GST, the following real property transactions are subject to GST:

	Sale or rent of vacant land
	Sale or rent of commercial premises
	Supply of accommodation in commercial residential premises, eg hotels
	Sale of new residential properties

For a property to be considered residential it needs to provide occupants with sleeping accommodation and some basic facilities for day-to-day living.

Note substantial renovation works that are carried out in stages may over time result in a residential property becoming ‘new’ and therefore subject to GST.

Newly constructed residential property which has been leased for more than 5 years will cease to be ‘new’.  Therefore when it is sold, it will not be subject to GST.  Please note the lease must be for a continuous period of five years.  The period cannot be broken by private use or by leaving the property vacant with no attempt to lease it.

Margin scheme

If the real property transaction is subject to GST, GST is generally calculated as 1/11th of the proceeds.

However, for sale of a real property that is subject to GST, the vendor and purchaser can choose to apply the margin scheme in certain circumstances.  Under the margins scheme the GST liability is calculated as 1/11th of the margin.

In broad terms the margin for property acquired pre 1 July 2000 is the difference between the sales price and the market value at 1 July 2000.  The market valuation needs to be worked out according to the methodology approved by the Commissioner for it to be a valid valuation.  The margin for property acquired after 1 July 2000 is the difference between sales price and the acquisition cost of the property.

Only certain supplies of real property are eligible to apply the margin scheme.  The vendor must have acquired the property either under the margin scheme or under a transaction where no GST was imposed (eg the previous owner was not registered for GST).  If the property was acquired under a fully taxable supply, the margin scheme cannot be applied on sale.

Previously, sale of property acquired GST-free under the going concern exemption was eligible for the margin scheme.  However, from 8 December 2008 onwards, this is no longer the case.  Whether the sale of such property is eligible for the margin scheme will depend on how the vendor acquired the property.

If the vendor originally acquired the property from a deceased estate, associates for no consideration, GST group members or member of a GST joint venture, the margin is based on the acquisition cost or market value of the transaction prior to the last acquisition.  This rule also applies if the vendor acquired the property by applying the GST-free going concern or farmland exemptions.

When to apply the margin scheme

The margin scheme results in a smaller GST liability.  It will also result in a lower amount of stamp duty payable as the stamp duty is calculated on the GST-inclusive amount of the sale price.  However, it is important to note that the purchaser is not entitled to claim input tax credits on GST paid for property acquired under the margin scheme.

As such, the margin scheme is usually more attractive to entities not registered for GST or entities using the property to make input taxed supplies.  There may be circumstances where entities entitled to claim input tax credits can still benefit from applying the margin scheme.  For example, it may be applicable to a property developer who intends to use the land for housing.

To be eligible to apply the margin scheme, the vendor and purchaser must agree in writing prior to settlement that the margin scheme applies.

The application of margin scheme can be complicated and we recommend that you seek advice prior to signing a contract of sale.

If you are acquiring a property GST-free, you may also need to obtain information from the vendor in respect of its acquisition of the land.  This information may be relevant when you eventually sell the property.

Claiming input tax credits

An entity registered for GST is entitled to claim input tax credits on acquisitions for a creditable purpose.  A creditable acquisition is something acquired in carrying on your enterprise to the extent that it is not used to make input taxed supplies or for private purposes.

Examples of acquisitions made in relation to real property transactions that may be entitled to input tax credit claims are:

	Purchase cost of a property
	Building and demolition costs
	Legal fees
	Selling costs such as agent fees and advertising
	Repairs and maintenance expenditure
	Purchase of depreciable assets
	Insurance

There will be no input tax credits on state duties and taxes, acquisition cost of property purchased from an unregistered seller or purchase of a residential property that is not a new residential property.  This is because no GST is charged on these expenses.

Further, you cannot claim input tax credits if you are going to use the property for input taxed supplies, such as residential rent.

Adjustments

You are required to make adjustments to the input tax credits you have claimed if there is a change to the extent you use the property for a creditable purpose.  There will be a change in use if you were using the property for a taxable or GST-free purpose but change to an input taxed or private purpose, and vice versa.  You will need to compare the intended use for creditable purpose to the actual use and make adjustments accordingly.

For example, you may acquire a property for the purpose of making a taxable supply such as to construct a building on the land and sell it as new residential property.  You are entitled to claim the input tax credits on the purchase and the construction cost at the time the costs were incurred.  However, at completion of the construction, you cannot obtain a suitable price for the sale of the property so you decide to rent it out instead. The property is now being used for an input taxed purpose, being residential rent.  There is a change in use and you are required to make adjustments to repay a portion of the input tax credits previously claimed.

This adjustment for the changes in use must be considered annually.  The first adjustment period is the period ended 30 June at least 12 months after the acquisition.  The numbers of adjustment period for an acquisition are as follow:

How can we help

GST and real property transactions can be very complicated. The GST issues discussed in this FocusOn are not exhaustive.  We recommend that you seek legal and tax advice on the potential tax and GST implications that may apply to a real property transaction you are intending to undertake.

We are also happy to advise on other property related tax issues such as income tax implications, stamp duties, etc.

Published : May 2010