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  • Applying GST to property

    If you supply property and are registered or required to be registered for GST, the sale may be:

    • Taxable – you're liable for GST on the sale and can claim GST credits for anything purchased or imported to make the sale (subject to the normal rules on GST credits). For example, the supply of new residential property or commercial properties.
    • GST-free – you're not liable for GST on the sale, but you can claim GST credits for anything purchased or imported to make the sale (subject to the normal rules on GST credits). For example, if the sale is a supply of a going concern.
    • Input taxed – you're not liable for GST on the sale and you can't claim GST credits for anything purchased or imported to make the sale. For example, the sale of existing residential premises.
    • Mixed – a combination of any of the above.

    Buying or selling new residential property

    If you are a supplier and build new residential premises for sale:

    • you’re liable for GST on the sale
    • you can claim GST credits for your construction costs and any purchases you make related to the sale.

    You can't claim GST credits for GST included in the sale price when:

    • the margin scheme is applied to a property sale
    • the supplier isn't registered for GST.

    If you purchase residential premises to use in your GST registered business, you can claim the GST included in the purchase price.

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    Contract of sale

    Property sales contracts should include:

    • if the contract price includes GST or not
    • if the margin scheme applies and, if so, the margin rate. This may be in a separate written agreement.

    You may want to include a clause that limits the liability of the supplier or purchaser if the GST treatment included in the contract is later found to be wrong.

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    Settlement adjustments

    When selling a property there may be adjustments for costs such as council and water rates.

    These adjustments are part of the amount payable for the property. They must be included:

    • on your activity statement at G1
    • when determining the amount of GST to include at 1A.

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    Claiming GST credits when purchasing property

    You can claim GST credits for GST included in purchases for your GST-registered enterprise.

    You can generally claim GST credits if you purchase property or land using a standard contract for your enterprise and GST was included in the sale.

    You can't claim GST credits when:

    • you aren't registered (or not required to be registered) for GST at the time of purchase
    • you only paid a deposit under a standard land contract – you must wait until the sale has been finalised
    • the supplier isn't registered for GST
    • you purchase an existing residence
    • you purchase a property as a private sale, including the family home
    • you purchase or construct new residential property for rental purposes, including build-to-rent properties
    • you purchase property as part of a GST-free supply of a going concern or GST-free farmland
    • you purchase property or land using the margin scheme
    • you purchase residential property, such as a room, unit or an apartment that you lease to a business suppling it as hotel accommodation with other facilities.

    If you are entitled to claim GST credits, you must:

    • hold a valid tax invoice issued by suppliers when you lodge your activity statement
    • claim them in your activity statement for the tax period that settlement occurs
    • claim them within four years of the due date of the activity statement for the reporting period the credit is claimable.

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    Tax invoices

    You can only claim GST credits with supporting documentation.

    When you purchase property and intend to claim GST credits:

    • make sure you get tax invoices
    • check that the contract price includes GST as contracts for property sales aren't normally valid tax invoices.

    A tax invoice can be requested if all of the following apply:

    • The supplier is registered or required to be registered for GST.
    • A sale, or part of a sale is taxable.
    • The margin scheme hasn't been applied.

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    Who reports the GST?

    Property sales need to be reported in the activity statement when settlement occurs: If you are a:

    • sole trader – you need to include it
    • member of a partnership – the partnership reports the sale, not individuals in the partnership
    • member of a GST group – sales should be reported against the representative member who is required to complete the activity statement on the members' behalf
    • trustee – the trustee reports it reports it using the trustee's ABN.

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    GST at settlement

    Purchasers of new residential property or potential residential land are required to:

    • withhold the GST from the contract price at settlement and pay that amount directly to us
    • pay the sale price to the supplier separately.

    The transitional period for contracts entered into before 1 July 2018 ended 30 June 2020.

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    Margin scheme

    The margin scheme is a way of working out the GST payable when you sell property as part of your business.

    You can only apply the margin scheme if:

    • the sale of the property is taxable
    • you are eligible to use it.

    As a supplier you must have made a written agreement with the purchaser before the settlement date to sell the property using the margin scheme.

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    GST adjustments for property transactions

    If the use of a property has changed from its intended or previous use – known as 'a change in creditable purpose' – you may need to make an adjustment on your activity statement.

    An adjustment is a change that increases or decreases your net GST liability for a reporting period.

    If you use the accounts method, you report these amounts on your activity statement at:

    • increasing adjustments at Label 1A GST on sales
    • decreasing amounts at Label 1B GST on purchases.

    Calculating adjustments

    To calculate your adjustments, you need the following information:

    • what you purchased
    • when you made the purchases
    • the GST-exclusive value of each purchase
    • the GST credits on purchases claimed when you lodged your activity statement
    • the tax period for which you claimed GST credits on the purchase
    • any previous adjustments made relating to the purchase
    • details of activity in marketing the property for sale (for example, the listing agreement with your real estate agent or advertising material)
    • a reasonable estimation of the selling price (if the property hasn't sold)
    • what you used the residential property for, including the period it was rented or used for private purposes
    • the amount of rent you received
    • the date you sold the property
    • the amount you sold it for.

    Next step:

    Change in use of your property

    When there's been a change in the use of the property from your original intention, it's called a change in 'creditable purpose'.

    You may need to make a GST adjustment on your activity statement if you bought, sold or rented a property and your actual use of the property is different to your intended use.

    Events that may trigger a change in creditable purpose include:

    • where you claimed GST credits on the construction of new residential property intending to sell, but then you rent it out prior to the sale
    • moving into new residential property and occupying it privately, while still trying to sell it
    • purchasing a property GST-free as a going concern, but using the property for another purpose to make taxable sales or GST-free sales
    • purchasing a residential rental property as part of the acquisition of a GST-free going concern but then deciding to keep renting the property
    • purchasing farmland GST-free but then deciding to use part of the land for an activity that involves making supplies that are not solely taxable or GST-free.

    The change in the actual use of the property means there has been a change in the creditable purpose.

    Example 1: Renting apartments originally intended for sale

    Bob constructs six residential units to sell as part of his business. Bob claims GST credits for all his purchases that relate to constructing the six units.

    Bob sells four of the units shortly after they are completed but is unable to sell the other two. Bob decides to stop marketing the two remaining units for sale and start renting them out.

    As he is now making input taxed supplies of rent, Bob's original intent to sell the new residential property as taxable supplies (that is a fully creditable purpose) has changed.

    Depending on how many adjustment periods each acquisition has, Bob may need to make an increasing adjustment in relation to the GST credits he claimed for the development of the two rented units, at the next applicable adjustment period.

    End of example

     

    Example 2: Selling apartments originally intended for rent

    Kevin is a property developer who is registered for GST. He subdivides a property into two lots and builds a residential unit on each lot. Kevin intends to sell one of the units (Unit 1A) and rent out the other (Unit 1B) for at least 10 years. As he has always planned to rent out one of the units, Kevin only claims GST credits in relation to the construction of Unit 1A and pays GST on the sale of that unit.

    Three months after Kevin originally rents out Unit 1B he gets an offer to buy the property, which is too good to refuse. Kevin decides to sell Unit 1B rather than rent it out.

    GST will be payable on the sale of the property as they are still considered 'new residential property'. As Kevin has used the property differently to his original plan (that is, he will make a taxable sale of the property instead of using the property to make an input taxed supply of residential rent), he will need to make a decreasing adjustment to recover some of the GST credits he did not claim.

    End of example

    Renting while waiting for a buyer

    If you build a property to sell, but then decide to rent it out while you are trying to find a buyer, you need to keep records to show that you're holding the property for a 'dual purpose'. This means, you intend to rent the property while trying to sell it by actively marketing it for sale.

    Example: Actively marketing a property while renting

    Helki builds a new residential property with the intention of selling it. Helki claimed full GST credits on the acquisition of the property and the construction costs.

    The property has been on the market for some months, so she decides to both:

    • rent it out
    • continue to actively market the property for sale.

    Because Helki's use of the property has changed from the way she originally intended to use it, she has a change in extent of creditable purpose and has to make an adjustment to repay some of the credits she claimed.

    End of example

    See also:

    • GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose
    • GSTR 2000/24 Goods and services tax: Division 129 – making adjustments for changes in extent of creditable purpose.

    Non-resident property owners

    If you're a property owner and not an Australian resident, you may still be required to pay GST on property transactions in Australia.

    Providing services to non-resident property owners

    If you provide services to non-resident owners of Australian property, those services are taxable. These services could include real estate management or preparing tax returns.

    Example 1: Real estate agent services

    Bourne Ltd (a company not resident in Australia) is GST-registered.

    Bourne Ltd owns a six-storey building in Sydney. The top two floors contain a luxury residential apartment. The remaining floors contain offices, medical suites and fashion outlets.

    A family rents the apartment as their residential home and the remaining floors are rented out as commercial property.

    Bourne Ltd uses an Australian real estate agent to manage the property. The services provided by the real estate agent are taxable.

    In this situation, Bourne Ltd:

    • can claim GST credits for the real estate services relating to the commercial property
    • can't claim GST credits for real estate services relating to the residential apartment
    • if the GST credits relate to both commercial and residential property apportionment will be required.
    End of example

     

    Example 2: Preparation of tax return

    Caroline, a non-resident of Australia, has owned a building in Australia since 1995. The building has two levels, with commercial property on the ground level and residential on the upper level.

    Caroline leases both the commercial and residential property, receives income and incurs deductions for the property. As a result, Caroline is liable to pay income tax in Australia.

    Caroline engages Jim (a registered tax agent) to prepare her Australian income tax return. Jim takes into account Caroline's income from both commercial and residential leasing when preparing her tax return.

    Jim's service is subject to GST. Caroline must pay GST on the whole of his services.

    If Caroline was entitled to register for GST, she could only claim a GST credit for the GST included in the price of Jim's services relating to the commercial leases.

    End of example

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      Last modified: 03 Jul 2020QC 21960