Property
Real property
Real property in GST is land, any interest in land such as a lease or licence to occupy, and buildings fixed to land, and its GST treatment depends on type and use.
Real property is the legal term for land and things attached to it. For GST it includes land itself, a lease of land or a building, a licence to occupy land, and any other right or interest in land, such as an easement. When a business sells or leases real property, it makes a supply of real property, and the GST treatment depends on what is being supplied and to whom.
The treatment varies widely. The sale of commercial property by a registered seller is generally taxable. The sale of an established home is input-taxed. The sale of new residential premises is taxable. The sale of farmland or a going concern can be GST-free. Rent from commercial property is taxable, while rent from residential property is input-taxed. This variety is why property transactions need particular care.
Real property is generally connected with Australia if the land is in Australia. This is simple, but it means that even a non-resident who sells land in Australia, in the course of an enterprise, may be making a taxable supply and need to deal with GST. The location of the land is the main connecting factor, whatever the nationality of the seller.
Several features are unique to property. The margin scheme can apply to some sales of property, so GST is worked out on the margin. The settlement withholding process applies to new residential premises and potential residential land, so the buyer pays part of the price to the ATO. Adjustments might apply if the use of a building changes, for example if a commercial building is converted to residential use. Each of these needs to be considered.
For buyers, the main questions are whether the price includes GST, whether they can claim a credit, and whether the sale is under a concession. A registered business buying a commercial building for its enterprise can generally claim the GST in the price, and the credit can be significant, so the cash flow effect of paying GST at settlement and getting it back later is worth planning. A buyer who will use the property for residential rental generally cannot claim credits.
For sellers, the issues are whether they are registered, whether the sale is in the course of an enterprise, and what category the property falls into. A person who sells their own private home is not carrying on an enterprise and no GST is charged. A developer is. Sellers must also keep records of how and when they bought the property because that can affect the margin scheme and the status of the property.
This is general information only. Property transactions often involve large sums, so it is wise to confirm the GST position with the ATO or a registered tax professional before signing a contract.
Worked example
A registered company buys a commercial warehouse for $2,200,000 including GST, planning to use it in its taxable business. The GST in the price is $2,200,000 divided by 11, which is $200,000. After settlement the company claims a $200,000 input tax credit at label 1B on its BAS. The seller, also registered, reports $200,000 of GST collected. The net effect to the company is a cash cost only until the credit is received.
Practical tips
- Ask early whether a contract price includes GST and whether a concession such as the margin scheme or going concern applies.
- Remember that the GST treatment depends on the type of property and its use, not just on whether it is real estate.
- Keep records of acquisition costs and dates, since they affect later sales.