When buying, selling, or renting property in Australia, GST is an important consideration for both buyers and sellers. While GST applies to many commercial transactions, residential property can be more complicated.
The GST rules depend on the type of property and the nature of the transaction. It is always best to consult a property accountant or accountant Melbourne for advice specific to your circumstances.
In this blog, we explain when GST applies to residential property transactions and what buyers, sellers, investors, and landlords need to know.
Understanding GST in Property Transactions
The Goods and Services Tax (GST) is a 10% tax that applies to most goods and services in Australia.
GST rules can become complicated when you deal with real estate. Whether GST applies depends on the type of property and the transaction involved. Residential and commercial properties have different GST treatments.
If you need help understanding your obligations, a property accountant can assess your circumstances and explain the relevant GST rules.
Is GST Payable on Residential Property?
In most cases, GST does not apply to existing residential property. However, different rules can apply when you sell a new residential property, substantially renovate a property, or use a property for certain purposes.
Here are the main situations to consider.
1. Sale of Existing Residential Property
The sale of an existing residential property generally does not attract GST. The Australian Taxation Office (ATO) treats these sales as input-taxed transactions.
As a result, sellers generally cannot claim GST credits for expenses that relate to the sale.
Example: Suppose you purchased a second-hand property and lived in it as your principal place of residence for 10 years. You now decide to sell the house. In most cases, you do not charge GST on the sale.
2. Sale of New Residential Property
The sale of a new residential property can attract GST.
A property generally qualifies as new if:
- It has never previously sold as residential premises.
- A developer or builder has constructed it and has not previously sold it as residential premises.
- The owner has substantially renovated the property and the property meets the relevant GST requirements.
Developers and builders who sell newly constructed houses, apartments, or townhouses generally need to account for GST.
Example: Suppose you purchase a brand-new apartment from a property developer for $1.1 million. The developer generally includes GST in the sale price and accounts for the GST with the ATO.
The amount you pay does not necessarily increase by another 10% after the advertised price. The contract and pricing arrangements determine how GST applies to the transaction.
3. Rental of Residential Property
Residential rental income is generally input-taxed. This means landlords do not charge GST on ordinary residential rent.
Landlords also generally cannot claim GST credits for expenses associated with providing residential accommodation.
For example, if you rent out a house for $800 per week, you generally do not add another 10% GST to the weekly rent.
However, different GST rules can apply to commercial property rentals and certain types of accommodation. If you are unsure which rules apply, speak with a property accountant.
4. Substantial Renovations
- Substantial renovations can change the GST treatment of a residential property.
- A substantially renovated property may qualify as new residential premises for GST purposes. The renovations must involve significant structural changes to the building. Cosmetic improvements, such as repainting or replacing fixtures, generally do not meet this test.
- For example, if you substantially renovate a residential property and later sell it for $1 million, GST may apply to the sale. You may therefore need to account for GST to the ATO.
- The rules around substantial renovations can become complex. If you plan to renovate and sell a property, speak with your property accountant before proceeding.
Commercial vs. Residential Property
It is important to note that GST rules differ significantly for commercial properties:
GST is generally applicable to the sale or lease of commercial properties unless the transaction qualifies for exemptions (e.g., as part of a going concern).
When dealing with property transactions, always confirm whether the property is classified as residential or commercial to determine the GST implications.
So, for example, suppose a vendor (seller) wants to sell an office for $800,000. Unless an exemption applies, the vendor will charge you $880,000, which is $800,000 plus another 10% for GST. The purchaser, more often than not, will be able to claim back the $80,000 GST from the ATO by lodging a BAS statement. Again, this area is quite complex so best to contact an accountant Melbourne with further questions.
Key Points for Buyers and Sellers
- Sellers: Check whether the property qualifies as new residential premises before determining whether GST applies.
- Buyers: Check whether the purchase price includes GST, particularly when buying from developers, builders, or commercial property vendors.
- Investors and landlords: Remember that ordinary residential rental income is generally input-taxed, so you do not charge GST on residential rent.
- Property developers: Consider your GST obligations before purchasing land, developing property, or entering into a sale contract.
- Commercial property buyers: Confirm whether GST applies and whether you can claim a GST credit.
Final Thoughts
GST generally does not apply to the sale or rental of existing residential property. However, GST can apply when you sell new residential premises or certain substantially renovated properties.
The GST treatment of property transactions can vary depending on the property, the transaction, and your circumstances. Understanding the rules before you buy, sell, renovate, or rent property can help you avoid unexpected tax liabilities and compliance issues.
If you are unsure about the GST implications of a property transaction, seek professional advice from a qualified accountant Melbourne or property accountant such as Nobel Thomas.
