With property values having increased in recent years, many property investors have been looking to maximise their return by subdividing their investment properties.
This article focuses on the subdivision of a rental property, however the same principles will also apply where an individual subdivides the land where their home is located.
Along with the practical issues that go along with the actual subdivision, investors also need to consider the GST implications. Existing residential premises are considered to be “input taxed” for GST purposes. This means there is no GST charged on either the rent received, or the sale price of the property, and no ability to claim any GST paid on expenses relating to the property. However, this treatment does not apply to vacant land, or to newly constructed residential premises.
Enterprise or business
Whether a property investor is required to register for and include GST in the sale price when they sell vacant land or a newly constructed residential property will depend on whether the activities related to the subdivision are considered an ‘enterprise’ or a ‘business’ for GST purposes.
Where an investor has owned a property for a number of years, and merely takes the minimum steps required to subdivide the property, then sell it, their activities will most likely be seen as the mere realisation of a capital asset, and not an enterprise.
At the opposite extreme, where an investor not only subdivides the existing property, but constructs a new house on the land, which they then sell, the activity will most likely be seen as an enterprise.
In between these two ends of the spectrum, there is a range of different levels of activity which need to be considered on a case-by-case basis. To determine if these activities constitute an enterprise it is necessary to consider the level of activity. This includes whether the owner has been involved in previous property development activities, their intention at the time that they decided to subdivide the property, and their intentions at the time that they first acquired the property.
GST requirement
Where the subdivision does not amount to an enterprise, there will be no requirement to include GST in the sale price, and no ability to claim any GST paid on expenses relating to the subdivision.
Where the subdivision is considered to be an enterprise, it will be necessary to include GST in the sale price. GST paid on the costs related to the subdivision and development of the property can be claimed as a credit as they are incurred.
Purchasers of residential property are generally not able to claim any GST paid on the purchase price.
Without any concessions, the GST which the seller is required to remit to the ATO will be 1/11th of the gross sale proceeds. However, the amount of GST can be reduced by applying the margin scheme.
Where an election to apply the margin scheme is made, the GST to be remitted on the sale of the property will be calculated as 1/11th of the difference between the gross sale proceeds and the original cost of the property. (Note, if the property was acquired prior to 1 July 2000, the GST will be calculated based on the property’s market value as at 1 July 2000 rather than the original cost.)
If a property is purchased from a vendor who is using the margin scheme to calculate their GST, the purchaser is not entitled to claim any GST on the purchase.
New rules which apply from 1 July 2018 now require the purchaser of newly constructed residential premises to withhold 1/11th of the gross sale proceeds and remit this to the ATO.
