The sale of a newly developed property is likely to attract GST.
In simple terms, if the developer is operating a business then the developer should be registered for GST. Whilst the sale of existing residential property is input taxed, the sale of a new or substantially renovated residential property will attract GST. That is to say, the purchaser will be required to pay GST in addition to the contracted sale price. This can be a substantial additional cost for a purchaser of a residential property (who can’t claim a credit for the GST paid) which is likely to reduce the price the purchaser is prepared to pay accordingly.
In response to this, it is common for developers to adopt the ‘margin scheme’. The margin scheme means that the contract price does not need to have GST added to it – but that the developer will have to pay GST on their ‘margin’. The margin is the difference between the sale price of the lot and the cost to the developer of acquiring the land. The developer will also be able to claim input credits for GST paid by the developer in developing the lots, to offset the GST they have to pay.
The developer can apply the margin scheme when the development is sold where:
- The developer acquired the property before 1 July, 2000 (the introduction of GST); or
- If the property was acquired after 1 July, 2000 where the property was acquired:
- From a vendor was not registered for GST or required to be registered;
- As existing residential premises (ie not subject to GST);
- From a vendor as a going concern or GST free farmland; or
- From a vendor that applied the margin scheme to the sale.
There are a number of issues that commonly cause confusion:
- As a developer, you don’t need to specify in your purchase contract (when you buy the development site) that you intend to apply the margin scheme when you sell.
- If you pay 10% GST on your purchase you will not be able to apply the margin scheme when you sell.
Please note that the above is a short summary of some very complex provisions. You should seek advice from a professional that is familiar with your circumstances and objectives.