GST and Property Development

7

GST liability

There is only a liability for GST where:

  • an enterprise is being carried on,
  • the annual turnover is at least $75,000 ($150,000 for non-profit bodies) and
  • a taxable supply is made.

Therefore, when selling a property there will be no GST liability unless all these requirements are met.

If an enterprise is being carried on, it must then be determined whether the supply of property is:

  • a taxable supply
  • an input taxed supply; or
  • a GST free supply.

There is the option of using the going concern concession (see below) where all the necessary conditions are met. This will result in the supply being treated as a GST free supply.

If the supply is taxable, there is an option to use the margin scheme (see Margin Scheme section below in this article).

 

What is an enterprise for GST purposes?

Enterprise is defined in section 9-20 of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) to include an activity or series of activities done:

  • in the form of a business (including any profession, trade, employment, vocation or calling);
  • in the form of an adventure or concern in the nature of trade; or
  • on a regular or continuous basis, in the form of a lease, licence or other grants of interest in the property.

An enterprise does NOT include activities done by an individual or partnership of individuals without reasonable expectation of profit or gain.

GST Determination GSTD 2006/6 states an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business, but which has the characteristics of a business deal. However, the sale of the family home, a private car or other private assets is not, without other factors being present, an adventure or concern in the nature of trade.

The ATO has issued Miscellaneous Taxation Ruling MT 2006/1 which discusses when it considers an enterprise is being carried on for GST purposes.

In that ruling, the ATO states that in isolated transactions where land is sold that was purchased with the intention of resale at a profit, the ATO considers these activities to be an enterprise.

This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before the sale. The ATO regards this to be in the form of an adventure or concern in the nature of trade.

Example 1: GST payable
Stefan and Krysia discover that the local council has recently changed its by-laws to allow for smaller lots in the area. They decide to take advantage of the by-law change. They purchase a block of land to subdivide it into two lots and to sell the lots at a profit. They carry out their plan and sell both lots of land at a profit.

Their activities are an enterprise being an adventure or concern in the nature of trade. Their activities are planned and carried out in a businesslike manner.

Example 2: GST payable
Tobias finds an oceanfront block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

Tobias carries out his plan. He purchases the land and lodges the necessary development application with the local council. The development application is approved by the council, and Tobias engages a builder and has the duplex built. He sells one unit and lives in the other.

His intentions and activities have the appearance of a business deal. They are an enterprise.

Further, there is a reasonable expectation of profit or gain as his plan has enabled him to be able to keep and live in one of the units.

Taxable, Input taxed or GST Free supply?

Taxable Supply

In the context of property sales, taxable supplies include:

  • the sale of land
  • the sale of new residential premises (discussed below)
  • the sale of commercial premises (including commercial residential premises such as motels).

Sale of vacant land

Vacant land cannot be residential premises.

In GSTR 2012/5, the Commissioner states he regards the residential premises as the land and the residential building on the land (i.e. the land and building are seen as a ”package”).

The sale of vacant land is therefore a taxable supply when sold in the course of carrying on an enterprise. There will generally be GST on the sale and input tax credits available to the purchaser where the land is acquired for a creditable purpose.

Input taxed supply

In the context of property sales, input taxed supplies include the sale of residential premises such as houses and units (but not the sale of new residential premises or commercial residential premises such as hotels

GST is not payable on input taxed supplies. However, GST on expenses associated with the supply (e.g. legal and accounting costs) cannot be claimed back as input tax credits. They would be included in the cost base of the asset where CGT is applicable.

GST free supply

If a supply is GST free, no GST is payable on the supply, but the entity is entitled to an input tax credit on any creditable acquisitions that relate to the supply.

Apart from the GST free going concern exemption discussed below, the other main types of GST free property supplies are:

  • the sale of farmland where there has been a farming business carried out on the land for at least 5 years before the sale, and the buyer intends that a farming business will be carried out on the land (s 38-480 of the GST Act);
  • the sale of land where it is subdivided from land on which a farming business has been carried on for at least 5 years and the land is sold to associates for no or less than market value consideration (s 38-475 of the GST Act).

What are residential premises?

Residential premises are defined at s 195-1 of the GST Act as land or a building that:

  • is occupied as a residence or for residential accommodation; or
  • is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation (regardless of the term of the occupation or intended occupation) and includes a floating home.

The purchaser’s intention is not relevant to the determination of whether the premises are residential.

New residential premises

Section 40-75 of the GST Act provides residential premises are new residential premises if they:

  • have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or
  • have been created through substantial renovations of a building; or
  • have been built, or contain a building that has been built, to replace demolished premises on the same land.

However, where the residential premises are sold after five or more years of having been rented continuously, they are not regarded as new residential premises and the sale is an input taxed supply.

Residential premises used for business

The ATO in GST Ruling GSTR 2012/5 states that the value of a supply of premises that includes residential premises to be used predominantly for residential accommodation needs to be apportioned to the extent that part of the premises is not residential premises. The ATO uses a modification test to determine this. This is illustrated by the two examples below.

Residential premises partly converted for business use
Shannon decides to partly modify her house to use in her profession as a doctor. She modifies an area of the house to provide office and consulting room space, an operating theatre, a waiting room and storage for the business. A sealed car park is also added to the property. Significant physical modifications are made to these areas, including the removal and alteration of walls, and the addition of lighting, hygiene facilities and security to meet industry standards. The existing lounge room is used as the patients’ waiting room. An existing bedroom is used for storage. No physical modifications are made to the lounge room or bedroom.

The modifications result in the part of the premises consisting of the office, consulting room, operating theatre and car park no longer being residential premises to be used predominantly for residential accommodation. Objectively, part of the premises is still designed predominantly for residential accommodation, comprising bedrooms (including the bedroom used for storage), a bathroom, kitchen, living room, lounge room and gardens.

If Shannon later sells or leases the premises, she will need to apportion the value of the supply between the taxable and input taxed parts of the supply.

No apportionment necessary
Rebecca is a solicitor. She lives in a terrace house that is not new residential premises and decides to convert a room at the front of the house into an office for her practice. Rebecca arranges the installation of an electricity point and telephone line for the place in the room where she intends to set up a printer and facsimile machine. She fits the room out with bookshelves, filing cabinets, a desk, office chairs, a table for the printer and facsimile machine, and suitable floor coverings. She also has an advertising sign placed outside the front door of her house. Rebecca does not modify any of the other rooms in the house.

The ruling states these changes are not sufficient to modify the physical characteristics of the terrace house into premises other than residential premises to be used predominantly for residential accommodation. If Rebecca sells or leases the premises she will be making a wholly input taxed supply.

Sale of new residential premises and changes in creditable purpose

The sale of new residential premises is a taxable supply whereas the renting out of residential premises is an input taxed supply, as is the sale of residential premises which are not ‘new’. Consequently, input tax credits are available where residential premises are constructed for sale but not where they are constructed to rent.

Where residential premises built for sale are subsequently rented out, there is a change in creditable purpose. Changes in the extent of creditable purpose may lead to adjustments under Division 129 of the GST Act.

Division 129 provides for adjustments concerning things in tax periods that are adjustment periods. The number of adjustment periods that relate to a thing is determined by the GST-exclusive value of the acquisition.

The number of adjustment periods for acquisitions (that do not relate to business finance) is set out in the following table.

GST-exclusive value of the acquisition Adjustment periods
$5,000 or less Two
$5,001 to $499,999 Five
$500,000 or more Ten

GST Ruling GSTR 2009/4 explains the Commissioner’s view of when adjustments arise. The ruling states the Commissioner accepts there can be a dual purpose where new residential premises are rented out at the same time they are available for sale.

Change of use adjustments

The Commissioner in GSTR 2009/4 accepts that developers constructing residential premises may have a dual planned use for the premises – the premises can be applied to creditable and non-creditable purposes at the same time. For example, an entity may construct new residential premises for sale. The premises may continue to be held for sale as part of the entity’s enterprise of constructing new residential premises for sale. However, due to a downturn in the property market, the entity may also make the premises available for lease for a period until the market conditions improve. This will be a dual application of the premises during the relevant period (the period between acquisition and the end of the adjustment period).

The Commissioner’s view is that where there is a dual purpose, input tax credits may be available to the extent they relate to the planned taxable supply of the premises. However, the ATO must be satisfied with this dual-purpose and it is up to the taxpayer to prove it to the ATO. If the dual purpose cannot be proved, an adjustment will have to be made to return all input tax credits claimed concerning the premises being leased out. This happened in the case of AAT Case [2009] AATA 569, Re GXCX and FCT.

If an entity is required to apportion its creditable purpose it must do so by applying a method that is fair and reasonable in the circumstances of each case.

A formula provided in the Ruling is:

“Consideration for the taxable supply of the premises” divided by “consideration for the taxable supply of the premises plus consideration for the input taxed supplies of residential premises by way of lease”.

Example: partly input taxed and partly creditable planned use
Jane is registered for GST and constructed new residential premises for sale and was entitled to full input tax credits on her acquisitions. However, because the market for new premises was slow Jane leased the premises for six months before the premises were finally sold. Jane received $15,000 in rent over the six months. The premises were sold for $500,000. There had been no private or domestic use of the premises.

At the end of the next adjustment period following the sale, Jane calculates the extent of creditable purpose using the formula above as follows:

$500,000
$500,000 + $15,000
= 97.09%

Jane has an increasing adjustment of 100% – 97.09% = 2.91%.

The going concern concession

Section 38-325 of the GST Act provides that the supply of a going concern is GST free where certain conditions are met. This instantly results in stamp duty savings. It also means that the purchaser does not have to obtain additional funds to cover the GST that would otherwise be included in the price of a going concern if the section did not apply. GST on the expenses associated with the sale may still be claimed back as input tax credits by the vendor.

However, the vendor needs to be very wary as if a sale is not accepted as the supply of a going concern by the ATO, then the vendor, not the purchaser, will have the liability for the GST.

Conditions to satisfy

Sub-section 38-325(1) of the GST Act supplies a going concern that is GST free where all the following conditions are met:

  • the supply is for consideration;
  • the recipient of the supply is registered (or required to be registered); and
  • both parties have agreed in writing that the supply is a going concern.

A supply of a going concern is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement under which:

  • the supplier supplies to the recipient all the things that are necessary for the continued operation of an enterprise; and
  • the supplier carries on the enterprise until the day of the supply.

These are two additional conditions that must be satisfied.

Scenarios where the sale of property may amount to the supply of a going concern (assuming all the conditions above are met) include:

  • where it is one of the assets of an enterprise of property development
  • a fully tenanted building, where the property and all leases, agreements and covenants are included in the sale.

Important

Be wary of a ‘supply of a going concern’ which would otherwise be input taxed.

Input tax credits relating to a supply on sale of property which would have otherwise been input taxed (e.g. the sale of residential rental property) but is GST free because there is a supply of a going concern (e.g. the sale of leased residential rental property), are available to the extent that they relate to the supply under the arrangement.

However, Division 135 of the GST Act requires purchasers to make an increasing adjustment where they have acquired a GST free going concerned but then use the enterprise for input taxed or private purposes.

The High Court found for the Commissioner of Taxation on this point in the case of FCT v MBI Properties Pty Ltd [2014] HCA 49. The taxpayer and Mum and Dad investors bought residential apartments which were subject to leases to a company that used all the apartments together as part of a serviced apartment business. The apartments were sold as going concerns which meant the purchasers registered for GST.

The Commissioner issued GST assessments to the purchasers which included increasing adjustments under Division 135 as the apartments were now being used for input taxed supplies. The High Court held there were Division 135 adjustments for the purchasers.

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GST timing issues

Entities accounting for GST on a cash basis

When using the cash basis, the GST does not have to be remitted until it is received from the customers (i.e. the GST is attributed to the tax period in which the payment is received – section 29-5 of the GST Act).

No input credit entitlements arise until the purchases are paid and the entity holds a tax invoice for the creditable acquisition – section 29-10 of the GST Act.

A tax invoice is not necessary if the value of the supply is less than $82.50 (GST inclusive).

Entities accounting for GST on an accruals basis

Section 29-5 of the GST Act provides that accounting for GST on an accruals basis means that the whole of the GST payable must be remitted on the earlier of:

  • the issue of an invoice; or
  • the receipt of any consideration in connection with the supply.

The whole of the input credit entitlements on creditable acquisitions arise on the earlier of:

  • any consideration being provided by the entity; or
  • the entity becoming liable to provide any consideration,
  • and the entity holds a tax invoice for the creditable acquisition. A tax invoice is not necessary if the value of the supply is less than $82.50 (GST inclusive).
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Changes to attribution rules

The Commissioner can change the attribution rules where he is satisfied that otherwise, their application would be inappropriate.

With contracts subject to a statutory cooling-off period he has provided the GST liability or input tax credit entitlement is attributed to the tax period in which the cooling-off period expires;

With taxable supplies under a standard land contract, he has provided the GST is attributed to the tax period in which settlement. This is regardless of whether the vendor accounts on a cash or accruals basis.

Cessation of registration

Section 25-50 of the GST Act requires that if you are registered and are not carrying on an enterprise, you must apply to the ATO on the approved form for cancellation of registration. This must be lodged within 21 days after the day on which the enterprise ceased to be carried on.

Division 138 of the GST Act provides that an entity has an increasing adjustment if its registration is cancelled and, immediately before the cancellation, its assets include anything for which it was, or is, entitled to input tax credits and the last adjustment period has not ended.

For example, a going concern has been supplied, and in so doing the taxpayer is no longer required to be registered and therefore the GST registration is cancelled. The taxpayer may have an increasing adjustment under Division 138 concerning any assets not supplied as part of the going concern but kept.

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GST Margin Scheme

Margin Scheme Application and restriction

Application

The margin scheme is available on a taxable supply of real property made by:

  • selling a freehold interest in land
  • selling a stratum unit, or
  • granting or selling a long-term lease (generally more than 50 years).

Generally, the margin is the tax-inclusive sale price less the original purchase price.

Example
Don, a property developer, is registered for GST. This year on 1 February, he bought land for $200,000. The supply of the land to him was not taxable.

He sold the land six months later for $288,000. He chose to apply the margin scheme to his sale of the land.

Under the margin scheme, the margin for the supply of the land is $88,000 = $288,000 – $200,000. The GST payable on the margin is $8,000 = 1/11 of $88,000.

Restriction

The margin scheme cannot be used if the entire freehold interest, stratum unit or long-term lease was acquired through a supply that was ineligible for the margin scheme.

“Ineligible for the margin scheme” means a taxable supply on which the GST was worked out without applying the margin scheme – section 75-5(3) A New Tax System (Goods and Services Tax) Act 1999 (the GST Act).

This requirement means that generally the margin scheme can only be used where no GST was charged when the real property was acquired, i.e. when the property was:

  • acquired from a supplier who used the margin scheme
  • acquired from an entity that was not registered or required to be registered
  • supplied in a GST free supply
  • supplied in an input taxed supply; or
  • acquired through inheritance and certain conditions are satisfied.

Note also that with effect from 9 December 2008, the rules:

  • ensure that a supply that is ineligible for the margin scheme continues to be ineligible for the margin scheme after it is supplied as part of a GST free sale of a going concern, as GST free farmland, or it is supplied to a registered associate for no consideration. This is achieved by specifying that a supply is ineligible for the margin scheme if the previous supplier acquired the entire interest through a taxable supply on which the GST was worked out without applying the margin scheme
  • provide that where the real property is acquired GST free as part of a going concern, GST free farmland, or from a registered associate for no consideration, the calculation of GST on the subsequent sale of that property under the margin scheme should also account for the value added by the previous owner.

Agreement and impact on purchasers

Need for agreement in writing

The supplier and the recipient of a taxable supply of real property need to agree in writing to apply the margin scheme.

The written agreement must be made:

  • on or before the making of the supply (usual settlement); or
  • within such further period as the Commissioner allows

Practice Statement PS LA 2005/15 considers when the Commissioner will exercise his discretion to extend the time in which the agreement in writing must be made.

Broadly this will be where all the other requirements to apply the margin scheme have been met and no arrangement would have the effect of producing an outcome contrary to the legislative policy of the margin scheme.

Impact of margin scheme on purchasers

Purchasers of real property and premises where GST on the supply was calculated on the margin cannot claim input tax credits on the acquisition – section 75-20 GST Act.

Selling using the margin scheme would suit private buyers who will be paying less if the price is reduced by the vendor to reflect less GST payable and will not be able to claim input tax credits in any case.

Margin Scheme Calculation and adjustments

Calculating the margin

The margin for the supply is not:

  • the profit margin. Unlike an accounting profit margin, the margin for the supply for GST purposes does not take into account costs incurred in constructing a building or subdividing land or
  • calculated in the same manner as a capital gain under the Income Tax Assessment Act 1997.

The consideration for the acquisition does not include:

  • costs incurred by the supplier in developing the real property
  • legal fees, stamp duty, registration fees and transfer costs or any other related purchase expenses (instead, the supplier will be entitled to input tax credits if the acquisitions relate to improvements (such as subcontractors’ charges) and the acquisition of legal services are creditable acquisitions. There is no entitlement to input tax credits on stamp duty).

The AAT held in The Trustee for the Whitby Trust and FCT [2017] AATA 343 that option fees are not included in determining the margin.

Example
Bob is a builder who is registered for GST. On 1 December, Bob purchased a block of land for $300,000 from a vendor, who was not registered or required to be registered for GST purposes. He paid $3300 in conveyancing fees and $15,000 stamp duty on the purchase of the land.

Bob later constructs a house on that land and sells the house and land for $740,000.

When he was building the house, Bob incurred $220,000 for creditable acquisitions, for which he has tax invoices.

Bob chooses to use the margin scheme.

The margin will be $740,000 – $300,000 = $440,000

The GST payable will be 1/11 x $440,000 = $40,000.

Bob will be able to claim input tax credits of $300 and $20,000 on his creditable acquisitions.

On settlement of property transactions, it is usual that certain adjustments be made between the seller and the purchaser concerning such matters as rates and land tax. These adjustments are usually made per the provisions of the contract.

GST Determination GSTD 2006/3 provides that an entity (e.g. a property developer) that has purchased property, can include an amount charged to it by the vendor for land tax and council rates incurred by the vendor before settlement as part of the consideration for the acquisition of the interest when it subsequently sells that property and chooses to apply the margin scheme.

Where it is the vendor that is using the margin scheme, rates may also be assessed and paid by the vendor before the date of settlement. In such a scenario, the contract will usually require the purchaser to pay an extra amount to the vendor on settlement in respect of the balance of the period to which the rates relate, corresponding to the purchaser’s period of ownership. In this case, the vendor is receiving, and the purchaser is paying extra consideration for the sale and purchase of the land.

Example
If a house and land package is sold for $400,000 but the contract requires the purchaser to pay the supplier $330 for rates in respect of the balance of the period to which the rates relate, the margin for the supply of the house and land package is $400,330 less the acquisition cost.

Subdivided land, strata title units, amalgamated land

Where an entity purchases land, subdivides it or builds strata title units on it, and later applies the margin scheme in selling the subdivided land or units, the consideration for the acquisition of the subdivided land or the stratum title unit is the corresponding proportion of the consideration for the land acquired.

To ascertain the proportion of the purchase price that relates to the subdivided allotment or stratum title unit, GST Ruling GSTR 2006/8 para 58 states that any reasonable method of apportionment may be used.

Example from GSTR 2006/8 para 62
Josine is a property developer who is registered for GST. She acquired a block of land of 2,000 square metres for $240,000. The block was of uniform value per square metre. She subdivided the block into two allotments of 600 square metres each and one allotment of 800 square metres.

Josine decides to use an area basis to ascertain the consideration for the acquisition of the subdivided allotments.

The consideration for the acquisition for each of the 600 square metre allotments is $72,000 (600/2,000 x $240,000), whilst the consideration for the acquisition of the 800 square metre allotment is $96,000 (800/2,000 x $240,000).

If Josine sells the 800 square metre allotment for $140,000, the margin for the supply is $44,000 ($140,000 – $96,000) and the GST payable on the supply is $4,000.

The margin scheme can be applied in respect of amalgamated property even if some of the property was not purchased under the margin scheme or as a GST free, input taxed or non-taxable acquisition.

However, if an entity chooses to use the margin scheme on such sales it will have an increasing adjustment to recover any input tax credits that have been claimed. This adjustment is equal to the previously attributed input tax credit amount.

Margin Scheme Valuation

There are 3 main valuation methods available – GSTR 2006/7:

Method 1
Market valuation – The market value of the property determined in writing by a professional valuer and which complies with the criteria listed in para 24 of the ruling. Reference should be made to GST Margin Scheme Valuation Requirements Determination MSV 2009/1 which specifies the requirements for making valuations. The requirements apply to valuations for taxable supplies of real property made on or after 1 March 2010.

A professional valuer is:

  • a person registered or licensed to carry out property valuations under a Commonwealth, State or Territory law;
  • a person who carries on business as a valuer in a State or Territory where that person is not required to be licensed or registered to carry on a business as a valuer; or
  • a member of the Australian Property Institute and is accredited as a Certified Practising Valuer.

An in-house employee who is a professional valuer may be used. The valuer needs to provide a signed certificate that specifies:

  • a full description of the property being valued;
  • the valuation date;
  • the date the valuer provides the valuation to the supplier;
  • the market value of the property including the valuation approach and the valuation calculation; and
  • the qualifications of the valuer.

The ATO has published a Valuation Issues paper that identifies several issues important to the ATO in accepting that a valuation is valid.

It is important to meet the ATO requirements as the ATO will challenge a valuation it considers invalid – see Brady King Pty Ltd v FCT [2008] FCAFC 118.

Method 2

The value of the consideration provided by a purchaser in a contract for the sale & purchase of real property executed or exchanged before 1 July 2000 by parties dealing at arm’s length.

Method 3

The value as determined by the State Government or Territory Government department as the unimproved value, the site value, or the capital value of the land.

GST traps when selling property

Sale at an auction

Key question: was the purchase price in the contract GST-inclusive or not?

In Ashton & Anor v Monteleone & Ors [2010] NSWSC 258 the NSW Supreme Court was asked to determine whether the vendors were entitled to rectify a contract of sale for a property by adding GST to the sale price.

Joseph Monteleone was the successful bidder at an auction of a commercial residential property. His successful bid was $1,060,000. The sale was supposed to be GST inclusive (i.e. the $1,060,000 + GST). However, the vendors’ solicitor thought that the $1,060,000 already included the GST and this is the figure he put in the contract. The purchaser argued that he thought the amount he paid included GST and that he did not have to pay an additional amount for GST.

On the evidence presented, the NSW Supreme Court was satisfied that the auctioneer had made it clear that the bid price would be plus GST. The Court ordered that the contract be rectified to accord with the vendors’ intention.

The Court was satisfied that rectification could be ordered, as it was established that both sides knew, when they entered into the contract, that their common intention was to provide for a price consisting of the successful bid amount plus GST.

This case is, however, to be contrasted with Tam v Mannall & Ors [2010] NSWSC 250 which had similar facts but this time it could not be proved that the purchaser was aware that the bid price would be plus GST.

The NSW Supreme Court held for the purchaser that the purchase price was GST-inclusive. The Court stated that for rectification to be ordered, it must be established that both sides knew, when they entered into the contract, that their common intention was to provide for a price consisting of the successful bid amount plus GST. Having regard to the evidence, the Court held the vendors failed to prove this common intention existed.

Requirement for the purchaser to withhold GST

Purchasers of new residential premises and new subdivisions of potential residential land are required to make a payment of part of the purchase price to the ATO. Below is a summary of the main issues – see GST Withholding article for more detail.

The rules require that where an entity makes a taxable supply by way of sale or long-term lease of:

  • potential residential land that is included in a property subdivision plan; and does not contain any building that is in use for a commercial purpose; or
  • new residential premises (premises not previously sold as residential premises).

The purchaser is required to withhold and pay to the ATO 1/11th of the price for the supply, before or at the time consideration is first provided (other than as a deposit). In the majority of cases, this will be upon the settlement of the property.

Potential residential land means land that is permissible to use for residential purposes, but that does not contain any buildings that are residential premises. This includes land that has been zoned for use for residential premises under a law of a State or Territory but that does not contain any current residential premises.

A property subdivision plan means a plan for the division of real property that is registered (however described) under Australian law (e.g. strata title plans and plans to subdivide land).

Exclusions from withholding by the purchaser

There is no withholding obligation where the supply is of:

  • premises created through a substantial renovation
  • commercial residential premises

There is also no withholding obligation where:

  • the recipient of the taxable supply is registered for GST, and acquires potential residential land for a creditable purpose; or
  • a supply is between members of a GST group or is made by the operator of a GST joint venture to a participant in the joint venture.

Amount and timing of withholding

If the margin scheme does not apply, the purchaser must withhold 1/11th of the contract price or price.

If the margin scheme applies to the taxable supply, the purchaser must withhold 7 per cent of the contract price or price.

Special rules apply to supplies made between associates for less than the GST inclusive market value. In this case, the purchaser must pay the Commissioner an amount equal to 10 per cent of the GST exclusive market value of the supply.

Where withholding applies, the purchaser’s withholding obligation is triggered on payment of the first part of the purchase price, excluding the deposit. Where the purchase price is payable in instalments, this means the GST on the total purchase price must be withheld from the first instalment.Withholder purchasers are not required to be registered with the ATO.

The vendor is required to notify the purchaser

Vendors supplying any residential premises (whether new or not) or potential residential land by way of sale or long-term lease must provide the purchaser with a notification before making the supply advising whether the purchaser must withhold.

This means that Mum and Dad selling the family home are subject to the notification requirement once the legislation commences.

If withholding is required, the notice must also include:

  • details about the vendor (name and ABN)
  • the amount to be withheld
  • the date the amount must be paid to the ATO or a statement that payment is to be made at settlement.

The vendor does not have to provide a notice concerning:

  • potential residential land where the purchaser that receives the notice is registered for GST and acquires the land for a creditable purpose; or
  • the supply of commercial residential premises.

Credited for remitted GST

The entity that makes the taxable supply of new residential premises (or a new subdivision) is required to remit the GST to the ATO after lodging its BAS. However, it will be entitled to a credit for the payment made by the purchaser.

The availability of credit is contingent on the purchaser paying the amount to the Commissioner of Taxation. A credit will not arise merely because an amount has been withheld from a payment to the vendor.

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.