Property
Potential residential land
Potential residential land is vacant or partly built land that is permitted to be used for residential premises, and its sale by a registered seller is generally taxable rather than input-taxed.
Potential residential land is land that is permitted to be used for residential purposes, for example under local planning rules, but does not yet contain any buildings that are residential premises. It also includes land which has a building that is permitted to be removed or replaced with residential premises. The category matters because the sale of it by a registered seller is generally a taxable supply.
This is different from the sale of land with an established home on it, which is input-taxed. Vacant residential land is not itself 'residential premises', because nobody lives on it. For this reason, the law adds a special category to make sure that developers who subdivide and sell land are within the GST system, so they can claim credits on their development costs and charge GST on the sale price.
The distinction affects both sellers and buyers. A seller who is registered and carries on an enterprise of developing land charges GST, which is included in the price, and claims credits on costs such as roads, surveying and legal work. A buyer who is an ordinary person building a home pays the GST as a cost. A buyer who is a developer may be able to claim credits for GST in the price if they will make taxable supplies.
There are some exclusions. A sale of potential residential land is not taxable where the seller is not carrying on an enterprise, for example a private individual selling a block as a private matter, where the sale is not made in the course of an enterprise. If the seller is not registered and not required to be, the sale is also outside the GST system. These points make the seller's status important.
When potential residential land is sold by a registered seller, the settlement withholding rules usually apply, so the buyer withholds an amount from the price and pays it to the ATO. The margin scheme can also apply to a sale of potential residential land where the seller qualifies, so GST can be worked out on the margin instead of the full price. The seller must agree this in writing with the buyer.
A common misunderstanding is that all vacant land is subject to GST, or that all vacant land is exempt. Land that is not permitted for residential use, such as land zoned commercial or industrial, is not potential residential land, but its sale can still be taxable as commercial property. Zoning and permitted use are the starting point, so these should be verified.
This is general information only. For land sales or purchases, confirm the GST treatment with the ATO or a registered tax professional.
Worked example
A registered developer subdivides land and sells a vacant residential block for $440,000 including GST. As this is potential residential land sold in the course of an enterprise, GST of $440,000 divided by 11, which is $40,000, is included in the price. The developer reports $40,000 of GST and claims credits for development costs, such as $15,000 of GST on civil works.
Practical tips
- Check zoning and permitted use to see whether land is potential residential land.
- Sellers who develop and sell land should check whether registration and the margin scheme apply.
- Buyers should expect the settlement withholding process and check how the contract treats GST.