Small-Scale Property Development (Part 2): Do You Need to Pay GST?

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You're listening to Explain That by Velocity Legal, the podcast that keeps business owners and professional advisors ahead of the curve in an ever-changing legal landscape. This is part two of the tax implications of small-scale property developments. In part one, I was joined by Tom Warrington to discuss the revenue capital, the income tax and CGT consequences of small-scale property developments.

In this part, we'll be turning our attention to GST and the GST implications of small scale property developments. Welcome back, Tom. Thanks, Andrew. So Tom, let's continue. We in the previous episode we talked about the revenue capital distinction. Now we're talking about GST. Do you find in practice there's a lot of sort of misconceptions and myths about GST and when it applies? I think so. I think the biggest myth and I guess the biggest trap people fall into, which we see, is, you know, it's one off.

No, like it's a one off sale of a of a property. you know, I'm not a property developer. It's only one off, don't stress. let's move on, shall we? No, GST applies. I think that's probably the biggest concern we have with clients when they're like, no, but I'm not a property developer. Yeah. You know, it's just I've just done this once. so surely they don't have to play GS GST on on this sale. so I think that's probably where we see, I guess, the biggest misconception. Yes. Is that is that

Do I need to pay GST or not? Do I need to pay GST or not? No, surely not. Because you know, I've only it's only simple and I've only just done this once. it's probably the biggest misconception I think we came across. Well and well let's just d dive into that a little bit. So what where is the distinction? When do you essentially need to pay GST, leaving aside the other c criteria? But what is the what is the tipping point for for GST? Yeah, so GST will be payable if the you know

If the sale is a taxable supply, referred to as a taxable supply. And there are other criteria, you know, obviously for for consideration, which I guess the sale will obviously be, but w the the real tipping point, I guess, and where most of the time is spent in analysis is where that sale is made in the course of furtherance of an enterprise. The term enterprise, I guess it seems quite

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vague by nature. And I guess the the definition, they have defined enterprise further. and it kind of runs on a few criteria. And, you know, are you carrying on the is in the form of business? Are you selling in form of business? is it in the form of an adventure or concern of nature of trade? Which again, a very kind of vague term. Interesting wording, yep. Interesting wording. And then there's another one that discusses, you know, leases and licenses and they're a bit more less less applicable, I guess, this small scale development. So

The big turning point, I think, in terms of analysing whether something, whether a sale or a small scale property development would be a a taxable suppliers, you know, like we said, if this is kind of a one-off scenario, if we kind of focus on these kind of one-off sales by, by, by taxpayers, obviously we don't it's probably not a business. So we can probably not not really look at that one in too much detail. But then we probably have to look, we spend most of our time thinking, well, is this in the form of an adventure?

or concern in the nature of trade and what that kind of means. So the analysis goes to, okay, well, what is this enterprise concept? we we've kind of in a previous podcast talked a lot a lot about kind of the vague nature of capital revenue and what the fact it's very fact dependent. And I guess carrying an enterprise once again is a very fact dependent is a question of degree and fact analysis.

Thankfully the the ATO has provided some more guidance on this concept of enterprise and provide a range of factors that are relevant. but again, it's kind of looking at that commercial nature, the the the development again. so you know, was it a business asset? How'd you borrow the funds to do the work? was it like business like steps, I guess, taken to develop that property?

Was there active management by the taxpayer and decision making step by step, or was it more kind of on the back step? So again, the concept enterprise it is kind of varied, but it's also considered much a bit broader than the in the revenue capital kind of discussion, profit making, undertaking or scheme. Enterprise a little bit broader and considered kind of affects more circumstances often than the income tax side of of the property sale. So potentially you could have

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situation where you pay GST but you're on you're on capital account. Yeah. Exactly. Yeah. Exactly. That's interesting. Yeah, exactly. It can be simpler on the capital side, but some of the activities taken or or the nature of the sale might fit within that definition of enterprise to to you know make it a taxable supply. Yeah. and circumstances might mean that it is just a taxable supply and no other, you know, no other consider no other exemptions or anything can kick it out. Yeah.

Yep. So and I think one other change in this in this area that's perhaps a little bit different or than than the revenue capital discussion is that you've got these GST withholding rules. and how does that sort of change change sort of the equation? Yeah. So I guess ink like we said, revenue capital, we're talking about how you're gonna assess it in your your tax return once you've sold that property. Once the sale's gone through, et cetera settlement for that income tax year, you're wondering.

you know, is on capital account or revenue account. GST is a little bit different because you need to be more conscious of it prior to settlement. You know, you need to understand, have a good understanding as all is going to be GS is this property going to be subject to GST when I sell it. So at settlement is when the GST should be withheld. so you need to be a bit more on top of it when you when you go to sell a property if you are concerned or you think there's some element of

enterprise or or you know that it might be taxable supply, you need to talk to your accountant about okay, well, do we need to consider GST because do does the purchaser at settlement need to withhold GST? Do we need to include clauses in the contract about whether this is subject to GST? do they need to withhold you know, these steps need to be considered prior to settling and actually selling the property. So you just be a little bit more active in your consideration or or your discussion.

With respect to GST than you are income, a revenue capital. Yeah, because under that GST on those GST withholding rules, as a vendor, you have to tell the purchaser whether or not they need to withhold or not. Yeah. and in those gray situations, it's you know, which which position do you take? Do you take the the the more conservative or the less conservative? And yeah, it could sort of bring things to a head, I guess, far earlier than in that.

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revenue, capital, income tax context. Yeah. And and sorry, I mentioned like settlement, but you know, and I'm sure we'll talk about a bit later on, but things like the margin scheme, which we we'll discuss in more detail, but it's even better to be conscious of these pride even entering into a contract of sale. Because it can be harder if you need to make changes to the contract of sale after execution. So after the purchaser and the vendor have executed a contract to sell a property. If you then come to a realization as to certain

aspects of the GST and what you what the withholding might be or the margin scheme usage. it can be harder to kind of have those conversations with the purchaser to amend the contract rather, you know, than just be conscious of them prior to selling the property and know what and have those conversations with your conveyancer and, you know, your accountant to make sure the contract has everything you need in respective GST prior to even selling the property. Let's dive into that little bit further.

So, Tom, you mentioned the margin scheme. I understand if I'm selling a property and I need to pay GST, then normally I would just need to pay GST based on 10% of whatever I sell it for. How does the margin scheme differ from that? So, yeah, the margin scheme, like I said, differ from just a flat 10% of the purchase price. It actually just assesses the GST liability on what's known as the margin, which is the differential between what you actually purchase the property for.

And what the eventual sale price is. So it risk it limits that liability to the differential between those two amounts rather than 10% flat rate at the sale price. So you're gonna have to pay GST, you might as well pay less GST. You might as well pay less GST. So so if you do have to pay GST, definitely look into the margin scheme and whether it's eligible, whether you are eligible to use the margin scheme. And usually you would need to to specify that and agree upon that in the contract. Exactly. So one of the key requirements of the margin scheme.

Which you you must do to even use it is agree in writing with the purchaser that you're both that you are going to use the margin scheme. And often, like I said earlier, that means including it as a clause in the contract. And you've both executed the contract, you both agree that you'll be using the margin scheme. If for some reason you have executed the contract and it doesn't reference the margin scheme, the requirement is that you both agree in writing prior to settling.

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So you obviously can go to the effort of amending a contract, but you can also, you know, just agree in writing in some document that you both agree the sale of this specific property that you'll be making use of the margin scheme. So as long as that's done prior to settlement, then you can use the margin scheme, which like I said, r limits that liability on GST. Yeah, I've I've definitely, I'm sure you have as well, but I've definitely seen some of those situations where no one's turned their mind to it, they haven't agreed, and then

You know, there is an ability to go back so long as you get discretions and so forth to to agree afterwards. But you you certainly don't want to be in that situation where you're trying to you've sold this property and then you're trying to approach the purchaser and say, Hey, can you can you do me a favor? Can you agree the margin scheme applies? Yeah, exactly. And this is why you just need to, I think, turn your mind to the GST and the taxable supplier question, all these type of considerations prior to entering into any contract really with a purchaser, because it will just take out

that element of stress and faff and, you know, discussions with the purchaser because you know, then it's just agreed upon when you when they purchase when they execute the contract to purchase the property. So I think be forward thinking. Yep. if GST is a question, ask the question. Ask the question of your accountant. you know, be forward thinking just to to remove that element of stress. One other way that perhaps you can not have to pay GST, one common way is is the existing residential premises.

could you explain what that what that concept is? Yeah. So sale of, I guess, residential premises, existing residential is a thing called will be input taxed. and this kind of means that it won't it will no longer there's an essentially an exclusion as to a property may won't be a taxable supply if it is input taxed.

So we're thinking about, okay, what's a residential premises? That seemed quite a broad term. and I guess the the definition that they kind of use is is still, I guess, broad in that it focuses on the actual physical characteristics of that property. Well, is it used predominantly for residential accommodation? and that can be regardless of the time of occupation or how much how how long it's been occupied for. Let's it'll look at the physical characteristics of the asset and say, well, is that

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residential combination. And if so, that could be sufficient for it to be existing residential premises and an input tax. So not actually subject to GST. If that is the case though, you may need to look back on, okay, well, how have you treated your GST during a development, for example? Or if you've done substantial renovations to a property and the question of taxable spy pops up

have you been treating, have you been claiming input tax credits along the way? Because if it isn't input tax sale at the end, then we might need to go back and make some adjustments to those business activity statements. if you have treated it like it's going to be a taxable supply throughout the development process. So it it it is a and we do have these questions of clients a lot, but but I have rented this property, you know, a residential property.

to a business and you know it's been used for this business as their headquarters or you know to run their business surely it's commercial premises now it's not it's no longer residential and to that we can't say well like we said it's not the it's not the actual use of the property. It's what's the physical what's that characteristics of the property. And if it's physically and it's meant to be used as a residential premises if it has all the you know plumbing

you know, facilities of a residential premises, then it can still qualify as a residential premises despite being leased to, you know, a small business. Yeah. It's interesting. I guess the takeaway point from that is from what you're saying is that if it if it if it falls within existing residential premises, being that you know, it's a residential premises per that definition, and it's existing in the sense that that's been used like that for at least five years, then, you know, regardless of whether or not it's an enterprise or anything else, there's not gonna be GST.

Correct. Correct. correct. whereas if it's four years and five six months, then you know, potentially it's subject to GST. Yeah, yeah. And that five year five year requirement, I guess, if you have done some type of development or you've built, you know, a a property at the back, that five year requirement can also come into effect with when when considering whether it's

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a new residential premises. So it can be have all the like I said, it can it can be a residential premises. And if it's, you know, been rented out for more than five years or, you know, used for its purpose, you know, has those characteristics of as residential premises, it could be in bought tax. But if it's been constructed by you and used for hasn't been rented out at all, or you've owned it for two years and rented it out and now you've decided to sell it.

Although it has those key characteristics as a residential premise, it's now what's considered a new residential premise. And suddenly GST is back on the table. Yes. And and and we are suddenly back into the taxable supply, GST subject GST, how are we going to withhold it? All those questions are back on the table. so that five year requirement, a five year time frame is is something to consider. Five years will make it clear if you go to longer than five years, but if it's under five, it's

It you're still gonna have to ask a number of other questions and a number of considerations. Exactly. Yeah. Well, Tom, today we've talked about GST and small scale property developments. When does it apply? What's an enterprise? How might it be different to the revenue capital discussion? We've then talked also about, well, if it is an enterprise, can we use the margin scheme? Is it residential premises existing or new?

And also how does changing purpose affect things? I'd encourage listeners, if they have any questions regarding GST, please reach out to Tom. And I'm sure he's more than happy to field those. Thanks once again, Tom. Cheers. Thanks, Andrew.