GST, or Goods and Services Tax, applies to various aspects of our lives, including residential property transactions. Whether you’re buying, selling, or renting a home, understanding GST implications is crucial.
In this guide, we’ll break down everything you need to know about GST on residential property in simple terms. As a leading accountant Melbourne, we will cover all the aspects from the basics of GST to how it impacts residential leases and build-to-rent developments.
By the end, you’ll have a clear understanding of how GST influences residential real estate transactions and how to navigate tax planning effectively.
Let’s dive in!
What is GST on Residential Property?
GST only pertains to the sale of specific property types if the seller (vendor) is registered or obligated to be registered for GST purposes.
A residential property encompasses houses, units, flats, and similar dwellings. It denotes property designated for providing shelter and containing fundamental living amenities, excluding vacant land.
A property qualifies as a residential property if:
- it is habitable
- it is currently occupied or intended for occupation as a residence
- or it is designated for residential accommodation, irrespective of the duration of occupancy.
The Distinction Between New and Existing Residential Properties
New Residential Properties
A new residential property is one that meets any of these criteria:
- It’s never been sold as residential property previously.
- It’s undergone significant renovations.
- New structures have replaced demolished buildings on the same plot.
- It’s been rented out for under 5 years.
- It’s been rented out for over 5 years but actively marketed for sale during the rental period.
Existing Residential Properties
In contrast, GST treatment of existing residential properties is more straightforward. Generally, these properties are not subject to GST on the sale.
This includes houses or apartments that have been previously sold as residential property and have not undergone substantial renovations.
You can’t claim GST credits for costs involved when selling existing residential property, and if dealing with mixed-use properties (part residential, part commercial), GST might apply only to the commercial part.
GST Implications for Specific Residential Property Transactions
New Residential Properties and GST Requirements
When dealing with new residential properties in Australia, specific GST requirements come into play.
Firstly, purchasers are usually required to withhold a portion of the contract price on settlement and pay this directly to the Australian Tax Office (ATO), not to the property seller. This measure ensures compliance with GST obligations.
If engaged in an ‘enterprise’, sellers can claim GST credits on purchases related to constructing the property. However, they must also account for GST in the sale price, significantly affecting the overall cost and pricing structure of the property.
Off-the-plan Residential Properties: Buying and Selling
Purchasing off-the-plan involves a contract to buy a property before its construction is completed.
This scenario is particularly common in urban development projects where buyers commit to a property by paying a deposit and signing a contract, with the balance paid upon completion.
GST is generally included in the purchase price and is remitted to the ATO at settlement.
If you sell a property off-the-plan before settlement, it’s deemed a supply of new residential property, and thus, GST is applicable. Understanding these factors is vital for both developers and investors in the real estate market.
GST Rules for Selling Existing Residential Properties
For existing residential properties, the GST landscape differs significantly.
These properties are usually exempt from GST on sale – described as ‘input taxed’ sales where the seller doesn’t charge GST to the buyer and cannot claim GST credits on expenses related to the sale.
If a property involves mixed usage (residential and commercial), GST may only be applicable proportionately to the commercial element.
Additionally, transactions involving rent and security bonds from residential properties are not subject to GST, emphasising the nature of residential properties as predominantly GST-free in ongoing use contexts.
Whether you’re looking to buy a new home, invest in off-the-plan properties, or sell an existing property, knowing these details can provide a solid foundation for navigating the complex landscape of real estate taxation in Australia.
GST Treatment for Build-to-Rent Developments
The term ‘build-to-rent’ encompasses a broad concept, including all properties constructed with the intention of being rented or leased out. Different GST treatments apply depending on the type of premises supplied.
Application
Renting out residential premises for residential accommodation results in input-taxed rent.
Build-to-rent property developments, also known as multi-family developments, provide residential rental accommodation. Rent is GST-free for endorsed charities, gift-deductible entities, or government schools providing non-commercial residential accommodation.
Leasing commercial residential premises is subject to GST.
Commercial residential premises include:
- Hotels, motels, inns
- Hostels, boarding houses
- Caravan parks, camping grounds
- Other establishments offering similar services.
Leasing commercial property is subject to GST. Developments may consist of a mix of build-to-rent and build-to-sell properties or a mix of different build-to-rent properties with varied GST treatments.
If you are uncertain about the correct GST treatment for your build-to-rent property development, we recommend seeking advice from an accountant Melbourne team. Contact Roger Boghani today and consult with the best tax adviser.
Understanding How GST Applies to Retirement Villages
Independent Living Units
Independent living units are tailored for seniors who wish to live independently while enjoying the benefits of community living in a retirement village.
These units can vary widely, from apartments and townhouses to semi-detached or fully detached homes.
When it comes to leasing these units, GST is not added to the lease price, offering some relief to residents who choose these types of accommodations.
Similarly, ongoing maintenance fees charged to residents generally do not include GST unless these fees cover broader services beyond basic upkeep, which might then constitute a taxable or GST-free supply, depending on the specifics.
In terms of sales, the first sale of an independent living unit’s freehold title by the operator—which can occur if the unit has not been solely leased out for at least five years—counts as the sale of new residential property, thus attracting GST.
The operator can claim GST credits for related acquisitions.
Conversely, if an independent living unit is sold by a resident rather than the operator, this sale does not include GST, and no GST credits can be claimed.
Serviced Apartments
Serviced apartments within retirement villages cater to residents who require additional support, such as assistance with daily living activities or nursing services.
Unlike typical short-term serviced apartments, these are designed for long-term residency and are equipped with features such as emergency assistance systems and communal dining facilities.
The sale of such apartments may not include GST if all required conditions are met, such as the apartment being designed for aged residents needing specific care services.
When these conditions are satisfied, the operator can claim GST credits. These services, to qualify as GST-free, must provide necessary caregiver support within the premises and include services like meals, laundry, and cleaning that meet certain GST-exempt criteria.
Importantly, when leasing, hiring, or licensing serviced apartments, GST is not included in residents’ charges, provided the apartment delivers essential care and related services that align with the legal requirements for GST exemption.
Charitable Retirement Villages
When retirement villages are operated by endorsed charities, their circumstances under GST regulations show favourable terms.
These villages can supply accommodation, accommodation-related services, or meals to their residents on a GST-free basis. This exemption applies because the services are considered essential for the well-being of the residents and are aligned with the charitable goals of providing affordable, accessible housing and care.
Charitable operators are also entitled to reclaim GST credits for purchases related to these exempt supplies, which can significantly reduce the operational costs of running the village.
This not only supports the charity’s financial health but also enhances its ability to deliver high-quality services to the elderly.
Conclusion
Understanding GST on residential property is crucial for property owners, buyers, sellers, and developers. GST treatment varies depending on factors like property type and usage, with input taxed, GST-free, and GST-applicable scenarios.
Accurate knowledge and compliance are vital to maximising benefits and minimising liabilities in real estate transactions.
Consulting with an accountant Melbourne team is advisable for the effective navigation of GST regulations.
At Roger Boghani, we offer expert guidance and support to ensure our clients make informed decisions and remain compliant with GST requirements.
Trust us to help you navigate the complexities of GST in residential property transactions, allowing you to achieve your real estate goals with confidence.
