What to check before signing
If you’re a property developer, the GST on your developments can make the difference between a profitable project or one that loses money.
Let’s say a corner site comes up in Subiaco. A tired shop downstairs, a flat above, one title, and the agent is quoting four million dollars plus GST. Your feasibility treats the GST as a timing difference, because you will claim it back.
That assumption fails often enough to change the return on a project. The useful time to test it is while the price, the terms and the structure of the purchase can still be negotiated.
Understanding the whole picture
A developer buys a two storey building. The vendor is registered for GST and issues a tax invoice for the full price plus GST. Six months later the developer is still recovering that GST.
The reason is the building. The shop downstairs was a taxable sale, and the credit for that part came back from the ATO. The flat upstairs was an existing residence. Its sale was input taxed, so the GST charged on it was never payable. In this illustration the developer recovered that amount from the vendor. That is not necessarily the only recovery route: the buyer’s intended use and the vendor’s treatment of the GST also matter, as explained below. What the illustration does show is that nobody asked what each part of the building was before the contract was signed.
A tax invoice is not a credit
You get a credit only where the supply to you was taxable, you acquired the property for a creditable purpose, and you are registered or required to be registered. All three criteria have to hold to enjoy a GST credit from the ATO.
Preserving your credit
Where GST was charged that was never payable, rules exist that can preserve your credit until the vendor reimburses you, provided the vendor has accounted for that GST to the ATO and you do not know otherwise. They do not give you a creditable purpose you never had. If you intend to hold the flat and rent it out, the GST on it is not creditable whatever the vendor did. If you intend to demolish and build new residential premises for sale, the analysis is different. Those are the facts to establish before deciding which route to take.
Whether an amount is creditable is a GST question. Whether you can recover it from the vendor is a legal contract question, and a properly drafted GST clause is what gives the second one an answer.
Four questions decide the GST on a site
The name on title is not always the person selling the land. They may be an agent, a bare trustee, a manager or a partner, and a representative cannot take on the owner’s GST position. Ask for the supplier’s name and ABN during negotiations and check it on ABN Lookup – prior to settling on the transaction.
A long term landowner who never charged market rent may never have needed to register. Your position is different. Projected turnover looks forward twelve months, so expected sales of new residential premises can make your registration compulsory before anything settles.
That matters on a going concern purchase, where the purchaser must be registered or required to be registered. If neither is true at the right time, the concession is lost.
A sale of a capital asset is disregarded in working out projected turnover. A trust that has held a site for decades and is selling it as a capital asset may be able to cancel its registration before settlement or it may never have needed to register in the first place. On the right facts, this can materially affect acquisition funding and GST on resale.
Cancellation of GST by the vendor has conditions and a timetable. It is not automatic, it takes time, and the Commissioner fixes the date it takes effect. A long ownership period does not by itself make the land a capital asset, because preparing land for sale can turn it into trading stock.
Where it works, the developer may negotiate a lower price, fund no GST on acquisition, and take the full purchase price into the margin calculation on resale.
Residential premises are identified by physical characteristics: shelter and basic living facilities. Use and intention do not change that. On the Subiaco site the shop and the flat are two different things for GST, whatever the contract calls them.
Establish the Sale
A building that has been run as accommodation must be classified before its treatment is assumed. Establish whether there is a taxable sale at all before anyone talks about deregistration.
A pre contract GST review establishes those four answers for the site you are looking at, before the price is fixed. Start with the site address, the stage you are at and your next deadline.
Why going concern treatment needs checking
Two risks are well established. A development in progress is not automatically a going concern. In a Federal Court case the developer handed over land, plans and project files, but the works and marketing had stopped, and the Court held it was a taxable sale of land.
And while you might be able to recover GST from the vendor, it is hard to do so when the vendor has gone into liquidation. You want to make sure your protected, and your project is protected, before you commit.
Buying a residential leasing enterprise as a going concern can trigger an increasing adjustment. Where every supply through the acquired enterprise will be input taxed, the adjustment is ten per cent of the price, and the High Court has confirmed the principle. It belongs in the price before you commit.
Withholding at settlement
Since 1 July 2018 a purchaser of new residential premises, or of potential residential land in a subdivision plan, pays an amount straight to the Commissioner where the supply is taxable. It is due when the first consideration other than a deposit is paid, which is usually settlement but earlier under an instalment contract.
The vendor must give you written notice before the supply, and that duty covers residential premises generally, so a vendor of an established house must still tell you nothing is payable. An incorrect notice does not remove your obligation.
How you buy decides how you sell
If you acquire a property as a GST free going concern from a vendor who bought that property as a fully taxable supply means you cannot use the margin scheme on the apartments you build. On a project sold to owner occupiers that comes straight off the margin. The vendor’s acquisition history is a question for the negotiation, not for after settlement.
A second Subiaco example: the long held site
Different facts from the shop and flat. A family trust has held a Subiaco site since the 1980s, never charged market rent to the related business that used it, and agrees a price of $4 million exclusive of GST.
The two figures are different in kind. The $400,000 is funding that comes back. The $364,000 is a GST difference on the eventual sale that does not. Transfer duty may follow the lower price too, provided a higher unencumbered value does not set the dutiable value.
Before you sign, confirm
- Who the supplier is, checked against title and ABN Lookup
- Whether the vendor is registered, required to be, or able to cancel
- What the premises physically are, part by part
- How the vendor acquired the site and what GST treatment applied
- Whether the margin scheme will be available to you on resale
- Whether you have a withholding obligation, and whether the vendor's notice is correct
Common Questions
No. The contract allocates the cost. It cannot decide whether GST is payable. In one case the vendor proved the auction was plus GST and the Commissioner then ruled the sale was not taxable at all.
No. It removes GST from the purchase but can remove the margin scheme from your resale and can trigger an increasing adjustment. It needs to be modelled.
As the tax adviser on the project, working with whoever runs your finances, whether that is a CFO, a finance team or you, and with your solicitor. Responsibilities are agreed before work begins.
Pre contract GST review
You receive a written assessment of the proposed GST treatment, margin scheme eligibility and settlement cashflow, and the GST matters for your solicitor to address in the contract.
To start, tell us the site address, the stage of the deal and your next deadline.
The scope and fee are agreed first and depend on the decision you need to make and the information already available.
Already contracted? Tell us what has been signed and the next milestone, and we will identify the decisions and reporting obligations that remain.
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