GST Strategies and Property Developments

 Legislation

Current GST legislation states that you must register for GST when your business has a GST turnover of $75,000. The turnover is calculated as gross income from all sales less GST. Since it is highly likely that your property development will reach this threshold, you are therefore required to be registered for GST. This means that you can charge GST on sales and claim GST on expenses incurred during various stages of the development.

There are no GST exemptions available when it comes to property developments. Generally, it does not matter if the property is an investment or owner occupied as long as it is a residential property and not new there is no GST applicable. Property developments are considered new property therefore no GST exemption is available.

Now that we know a bit about the GST legislation and the treatment of property developments within the framework of GST, it is time to apply the usual scenario when it comes to a new development.

More often than not when you purchase land for development the seller will not be registered for GST. However, since you are expecting to reach the $75,000 threshold you are registered but can not claim any GST on purchase as no GST is charged by the seller.

At the completion of the project when you are selling the development whether as a whole or as individual units you are required to charge GST. Here at Cordner Advisory we can assist you with a couple of strategies to help deal with this issue.

Strategies

The first strategy is to sell your property development as a going concern which would mean the sale would be GST free. A going concern by definition is a business which is currently operating and making a profit.

The sale is a GST free sale if all of the following apply:

• The sale is for payment

• The purchaser is registered or required to be registered

• The purchaser and seller have agreed in writing the sale is a going concern

In order to sell a property development as a going concern you must:

• Have the sale include everything that is necessary for the continued operation of the business

• The business is carried on by you until the day of sale

• A fully tenanted building where the property and all lease agreements and covenants are included in the sale

• A partially tenanted building where the vacant part is actively marketed for lease or undergoing repairs or refurbishment

The second strategy is called a margin scheme, which is not so much a way of avoiding GST but a way of reducing it. If you are using the margin scheme you pay GST on the margin of the sale.

As an example, if the property is purchased for $700,000 and sold for $1,000,000 after development, the GST would be payable on the difference being $300,000 instead of the whole $1,000,000 if you are not using the margin scheme.

However there are conditions to satisfy in order to be eligible to use the margin scheme.

You cannot use the margin scheme if you:

• Purchased the property as part of a going concern

• The previous owner was registered or required to be registered for GST

• The previous owner purchased the entire property through a fully taxable sale (a business transaction) and GST was worked out without using the margin scheme

• You purchased the property from the previous owner as GST free farmland

• You purchased the property from an associate who was registered or required to be registered for GST

• The purchase of the property was without payment

• The sale of the property to you was not a taxable sale

• Your associate made the sale to you in the furtherance of a business that they carried on

• Your associate purchased the entire property through a fully taxable sale and GST was worked out without using the margin scheme

As you can see there are a range of exclusions from using the margin scheme, but it is particularly useful when purchasing private property and using it for property development.

Need Cordner Advisory to help?

As mentioned earlier it is crucial to understand the circumstances from the start of the project. Here at Cordner Advisory we are always available to help you navigate the eligibility of either strategy and how it could apply to your property development. Please call our office on (07) 5504 5700 to speak to one of our trusted advisors today.

Cordner Advisory - Your Business Advisory, Accounting & Tax Specialists. Catering for clients all across Australia, from the golden beaches of the Gold Coast and Sunshine Coast to the capital cities such as Brisbane, Sydney and Melbourne

If you need help with GST strategies and property developments, contact Cordner Advisory today for expert guidance.