GST and Queensland property: new homes, vacant land, margin scheme

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Kooky

Builder of Shaka, the payment router that pays every agent their commission on closing date.

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Most people who buy or sell a home in Queensland never think about goods and services tax, and most of the time they are right not to. The sale of an existing house between two private individuals carries no GST. Yet the tax sits inside the price of every new home, decides how much of a land developer's sale goes to Canberra, and since 2018 has required buyers of new homes to send part of the purchase price directly to the Australian Taxation Office at settlement.

The rules matter in three situations that ordinary Queenslanders do meet: buying a newly built home or a block in an estate, subdividing or building to sell, and signing a contract that mentions the margin scheme. This guide explains each, using the ATO's published guidance. It describes general rules only. Whether a particular sale is taxable can turn on small facts, and that question belongs with a solicitor or tax adviser before a contract is signed.

Three ways a property sale can be treated

The ATO sorts property sales into categories, and almost everything else follows from which one applies.

The distinction between input taxed and GST-free looks like a technicality, since neither adds GST to the price. It matters to the seller. GST credits are the refunds a registered business claims for the GST included in what it buys. A GST-free sale lets the seller keep those credits; an input taxed sale does not. That is why the owner of a residential rental cannot claim back the GST on repairs or agent's fees, a point taken up below.

Who is in the GST system at all

GST applies to sales made by an enterprise that is registered, or required to be registered. A private person selling private property is outside it.

The ATO's guidance says a person generally does not need to register if their property transactions are for private use, such as building or selling the family home, or if all they receive is residential rent. A couple who sell the house they have lived in for ten years are not making a taxable sale, whatever the price.

Registration becomes compulsory when the turnover of an enterprise reaches the general GST registration threshold of $75,000 a year. With property, a single transaction can exceed that many times over, and the ATO warns that even a one-off property transaction may amount to an enterprise. The question is not how often someone deals in property but what they did: buying land in order to subdivide and sell it, or building a house in order to sell it at a profit, can be an enterprise the first time.

This is the trap for the accidental developer. A homeowner who splits a large block and sells the back lot may simply be realising a private asset, or may be carrying on a development, depending on how the project was conceived and carried out. The difference can be one eleventh of the sale price.

What counts as new residential premises

The line that matters most to home buyers is between new and existing residential premises, because a sale of new premises is taxable and a sale of existing premises is not.

The ATO first defines residential property by what it is, not how it is used. A property is residential if it is suitable for, and capable of being occupied as, a residence, a test of physical characteristics. A house used as an office is still a house.

Residential premises are new, according to the ATO, in three cases: they have not previously been sold as residential premises; they have been created through substantial renovations; or they are new buildings replacing demolished ones. A house and land package bought from a builder, an apartment bought off the plan and a townhouse built on the site of a knocked-down cottage are all new on those tests.

Two refinements are worth knowing.

The first is the five-year rule. Premises that have only been rented out since they were built eventually cease to be new. The ATO's guidance places the line at five years of rental. A developer who cannot sell and rents out a completed unit instead is still selling a new home, with GST, if a buyer is found before that point, and the detail of how the period is counted is a matter for advice.

The second is renovation. Work has to be substantial to turn an old house into new premises: the ATO's test is concerned with renovations that affect the building as a whole, not a new kitchen and a coat of paint. A person who buys, renovates and resells as a business needs advice on which side of that line a project falls, because one outcome is a taxable sale and the other is an input taxed one.

Buying a new home: the GST is already in the price

For the buyer of a new home, GST is not an extra added at the end. The advertised price includes it. A private buyer cannot claim it back, and the ATO notes that an off-the-plan purchase includes GST at settlement in the same way.

What changed on 1 July 2018 was who sends the GST to the tax office. Since that date, the ATO says, a purchaser of new residential premises or potential residential land must withhold an amount from the contract price at settlement and pay it directly to the ATO, paying the balance to the seller. The measure is usually called GST at settlement. Its effect is that the tax on a new home reaches the ATO on the day of settlement instead of waiting for the seller's next activity statement.

The buyer pays no more than the contract price. Part of it simply travels by a different route.

The amount depends on how the sale is taxed. The ATO sets three rates: one eleventh of the contract price for a standard taxable sale, 7 per cent of the contract price where the margin scheme applies, and 10 per cent of the GST-exclusive market value where the parties are associates and the price is not a market one.

On an $880,000 new house under a standard contract, to take an illustrative figure, the buyer withholds one eleventh, which is $80,000, and the seller receives $800,000 at settlement. The seller is then credited with the $80,000 against its own GST liability.

The seller's written notice is required for more sales than the withholding itself. The ATO says suppliers must tell the purchaser before settlement whether withholding applies, and where it does, the notice must give the supplier's name and Australian Business Number, the amount to be withheld and when it must be paid. A seller who fails to give the notice can be fined up to 100 penalty units. A buyer who should have withheld and did not can face a penalty equal to the amount.

The ATO lists the sales to which withholding does not apply: premises that are new only because of substantial renovations, commercial residential premises such as hotels, premises that have been sold as residential before, and potential residential land bought by a GST-registered buyer for a creditable business purpose.

Vacant land

Land with nothing on it follows the seller, not the soil.

A private individual who sells a vacant block they held privately is not making a taxable sale. A developer who sells a lot in a new estate is, and the price of that lot includes GST. The buyer of a lot in a subdivision is caught by the same withholding rule as the buyer of a new house: the ATO applies GST at settlement to what it calls potential residential land, meaning land that can be used for residential purposes and does not yet have a home on it, where it is included in a property subdivision plan.

For a first home buyer purchasing land to build on, this means two transactions with two treatments. The land, bought from a developer, carries GST and may require withholding at settlement. The building contract carries GST as well, charged by the builder on its invoices in the ordinary way. Neither amount can be claimed back by a private buyer.

Farmland has its own treatment. The ATO lists some sales of farmland among the GST-free categories, subject to conditions about how the land has been used and how the buyer intends to use it. Where rural land on the edge of a town is sold for housing, the conditions are unlikely to be met, and the treatment needs advice.

The margin scheme

The margin scheme is the part of property GST that most often appears in a contract without being understood by the people signing it.

The ATO describes it as a way of working out the GST payable when property is sold as part of a business. Under the ordinary rule, GST is one eleventh of the sale price. Under the margin scheme it is one eleventh of the margin, the difference between the sale price and what the seller paid for the property.

The ATO's own example shows the effect. A GST-registered builder buys land for $500,000 from a seller who was not registered, so no GST was charged and the builder had no credit to claim. The builder constructs a house and sells the property for $900,000. The margin is $400,000 and the GST is one eleventh of that, $36,363. Under the ordinary rule the GST on a $900,000 sale would be one eleventh of the whole price, $81,818.

The scheme exists because of the gap in the chain. GST is meant to tax value added at each stage, with credits for the tax already paid. When a developer buys land from a private owner there is no GST in the purchase and no credit, so taxing the whole resale price would tax the land's value twice over in effect. Taxing only the margin restores the balance.

For land bought before GST began on 1 July 2000, the ATO provides a valuation method: the margin is the sale price less an approved valuation of the property at that date. For anything bought since, the consideration method applies and the margin is the sale price less the purchase price.

Subdivisions need the purchase price to be divided between the lots. The ATO accepts any reasonable method of apportionment, and gives the example of a 2,000-square-metre block bought for $240,000 and divided by area into two lots of 600 square metres and one of 800. Each smaller lot is allotted $72,000 of the price and the larger lot $96,000. When the larger lot sells for $140,000, the margin is $44,000 and the GST is $4,000.

Conditions and common mistakes

The margin scheme is optional, and it is not available to every seller. The ATO's practical guidance for tax professionals sets out the limits.

Eligibility depends on how the seller acquired the property. The scheme cannot be used where the seller bought the property in a sale on which GST was charged on the full price, because in that case the seller had a credit and there is no gap to correct. The ATO also flags property that was inherited, acquired from a fellow member of a GST group, or acquired GST-free as a going concern or as farmland, as situations in which the scheme is unavailable or special rules look back to the previous owner's position.

The parties must agree in writing. The ATO requires the seller and purchaser to agree that the margin scheme applies before the settlement date, and says the agreement should be included in the contract of sale. An agreement made after settlement is too late.

The margin is narrower than profit. The ATO is specific that the costs of developing the property and other expenses are not included in the purchase price for the calculation. Construction, civil works, legal fees and holding costs do not reduce the margin; the GST on those costs is claimed separately as credits on activity statements. Stamp duty carries no GST and generates no credit. Among the errors the ATO lists are applying the scheme before confirming eligibility, including development costs in the margin, and failing to document the written agreement.

For the buyer, the scheme has one consequence that matters only to some. The ATO says a buyer cannot claim a GST credit on a purchase made under the margin scheme, and no tax invoice is issued for it. A private home buyer could not have claimed a credit anyway. A registered buyer, such as a builder purchasing a lot to build a spec home, loses a credit they might otherwise have had, and should understand that before agreeing.

The withholding rate reflects the scheme only roughly. A buyer withholds 7 per cent of the contract price on a margin scheme sale. On the $900,000 example that is $63,000, well above the actual GST of $36,363. The seller is credited with the amount withheld and recovers the difference through its activity statement, but the cash is out of its hands in the meantime.

Renting out residential property

GST's treatment of rent explains much of how residential investment works.

The ATO states that rent and bonds for residential premises are not subject to GST. Residential rent is input taxed: the landlord charges no GST and, in return, cannot claim credits for the GST in the costs of earning it. An investor pays GST on the property manager's fees, the plumber's invoice and the insurance premium, and bears it as a cost. The same applies at scale: the ATO confirms that build-to-rent residential accommodation is input taxed.

Commercial residential premises are the exception. Hotels, hostels and caravan parks are taxable, the ATO says, which is one reason the boundary between a serviced apartment business and a residential letting is examined closely.

The interaction that catches developers is a change of plan. A builder who constructs homes to sell claims credits on construction costs, because the intended sales are taxable. If the market turns and the homes are rented out instead, the use has changed from making taxable sales to making input taxed rent, and the ATO says adjustments on activity statements may become necessary. In plain terms, some of the credits may have to be paid back. And if the homes are sold while still new, GST applies to the sale.

Commercial property, going concerns and mixed sites

Sales of commercial property, such as shops, offices, warehouses and industrial sheds, are taxable. A registered buyer who will use the property in a taxable business can ordinarily claim the GST back, with a valid tax invoice, so the tax is a cash-flow matter more than a cost.

Where a tenanted commercial building is sold with its leases in place, the parties often treat the sale as the supply of a going concern, which the ATO lists as GST-free. The conditions are strict: everything necessary for the continued operation of the enterprise must be supplied, both parties must be registered or required to be, and they must agree in writing that the sale is of a going concern.

Many Queensland main-street properties are mixed, with a shop on the ground floor and a flat above. The ATO's mixed category applies, and the price has to be apportioned between the taxable commercial part and the input taxed residential part.

Questions to settle before signing

GST on property is settled by the contract and the facts on the day it is signed, and it is difficult to repair afterwards. The points below come up in most transactions where the tax is in play.

1. Is the seller registered for GST, or required to be, and is the sale part of an enterprise?
2. Are the premises new residential premises, existing residential premises, commercial, or a mixture?
3. Does the price include GST, and does the contract say so in terms?
4. If the margin scheme is to apply, is the seller eligible, and is the written agreement in the contract?
5. Has the seller given the written notice about withholding, and does the buyer's conveyancer have the amount and the ATO forms in hand before settlement?
6. If the buyer is registered and expects a credit, will a tax invoice be issued, and does the margin scheme rule that out?
7. For anyone building to sell, what happens to credits already claimed if the property is rented instead?

For the private buyer of an existing home, the answer to the first question ends the enquiry. For everyone else, the list is the agenda for a conversation with a solicitor and an accountant, held before the contract and not after it.

Kooky, from Shaka

Kooky edits Queensland Estate and builds Shaka, the payment router he made for Queensland property professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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