Selling your own home usually does not come with the burden of Goods and Services Tax (GST), but the scenario may change when it comes to selling an investment property. For property investors navigating the world of buying and selling real estate, understanding the potential GST implications is essential.
Do you have to pay GST when selling an investment property?
While property transactions involving private use or those generating residential rent typically do not require GST registration, you may be required to register for GST if:
- the turnover from your property transactions (such as lease or sale of non-residential premises or sale of new residential premises) and other taxable transactions is more than the GST registration threshold of $75,000; and
- your activities are regarded as an ‘enterprise’, for example – if you buy land to develop it for resale at a profit. Even a one-off property transaction may be considered an enterprise.
Practically, if the property has not previously been sold as a residential home or if it has been substantially renovated or built to replace a demolished property (classified as a new residential property), then it is likely that you will trigger GST liability on the sale of that property provided that it is in the course of carrying on an enterprise.
If that is the case, you will generally have to pay GST, which normally works out to be 10% of the pre-GST sale price (or one-eleventh of the total price). You should, therefore, allow for GST in the selling price of your property.
However, if you meet the eligibility criteria, you will be eligible to use the GST margin scheme to calculate the GST on your sale, resulting in potential savings.
Unlocking Savings with the GST Margin Scheme
For eligible property sellers, the GST margin scheme offers a concessional way to calculate GST on a property sale. Rather than paying GST on the gross or total selling price, the scheme allows you to pay GST on one-eleventh of the sale margin.
The sale margin is determined by subtracting the original purchase amount from the selling price, resulting in a figure lower than the entire sale price. This reduction in the GST payable proves to be advantageous for eligible property sellers, especially in the case of new properties or those substantially renovated.
Illustrative Example: The GST Margin Scheme in Action
Consider a property purchase at $770,000, followed by substantial renovations, leading to a resale at GST exclusive price of $1,650,000. Without the GST margin scheme, the GST payable would be $150,000 (1/11th of the total sale price). However, with the application of the margin scheme, GST is calculated on the sales margin ($880,000), resulting in a significantly reduced GST of $80,000 – a potential saving of $70,000.
You will also be entitled to claim a GST credit for any GST paid on the renovations, further reducing the actual GST payable.
Eligibility and Implementation of the GST Margin Scheme
The eligibility for the GST margin scheme hinges on various factors, including the property’s initial purchase date and how GST was applied at that time. Consultation with a tax adviser is recommended to navigate these complexities successfully.
Implementation of the GST margin scheme also requires agreement between the buyer and seller, involving specific clauses in the sale contract. Again, external advice is important to ensure compliance with these requirements.
In conclusion, for property investors, understanding GST implications and strategically applying the GST margin scheme can be significant in terms of financial outcomes. To tailor these insights to your specific situation, consult with your tax adviser and legal professionals for personalised guidance.
If you would like to learn more about the GST margin scheme and its implications on your investments, please contact Calibre Business Advisory on (02) 9261 2177. Our team will be more than happy to assist.