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GST and the buying or selling of real estate premises

Whether a sale of property is subject to GST will be dependent on a number of factors. The sale of real property must be made in the course or furtherance of an enterprise before it is brought into the GST system.

One way to explain the relevant considerations is through an example:

Alan, a sole trader in business as a butcher, and who is registered for GST, decides to sell a block of land he has held for many years for personal purposes. He would not be liable for GST on this transaction as the sale was not made in the course or furtherance of his butcher enterprise.

If, however, Alan sold the premise that was used for his butcher business, the disposal is a disposal of a capital asset that is connected to his enterprise. As he is registered for GST and the property is a commercial property, the sale will be subject to GST. It may not be in the ordinary course of Alan’s butchery business to sell the property, but it is still considered to be in the course or furtherance of his enterprise to dispose of a capital asset.

An entity’s GST registration status will also determine whether a sale of real property is subject to GST. An entity not registered and not required to be registered for GST will not be required to charge GST on the sale of the property.

Note however that a single activity of developing and selling a property could be sufficient for the ATO to require a person to be registered for GST, as they may be considered to be carrying on an enterprise for GST purposes (an adventure in the nature of trade).

Mere realisation of assets will not however be considered an enterprise. The ATO will generally take a narrow view of what amounts to a mere realisation and in its guidance has published many examples of what may and may not constitute an enterprise in respect of buying and selling real property.

If an entity that owns real property derived rental income from such property but was not required to register for GST as it was under the registration threshold, it is not required to register for GST when it sells the property on the basis that it is a sale of a capital asset (that is, the property was never acquired to re-sell at a profit). Capital assets are excluded from the calculation of projected GST turnover for GST registration purposes.

Summary of GST status for sale of real property

Type of property               Example                                    GST treatment

Residential premises         Existing residence                    Input taxed

New residential premises  Newly built or substantially      Taxable*                                                                                            renovated or built to replace

Commercial residential      Hotel, motel, boarding house  Taxable*

Commercial property         Factory, office                          Taxable*

Farm land                           Sale to farmer                           GST-free if sold on the basis of                                                                                                          continued use as farm land

Going concern                   Sale of property as part of       GST-free if conditions satisfied                                                       an enterprise

Commercial residential:

      short-term                    Hotel                                         Taxable*

      long-term                      Boarding House/                     Input taxed/concessional                                                                  on-site caravan

Commercial property         Factory, office                           Taxable*

Lease for more than           Lease for 100 years                   Treated as a sale (see above table)    50 years

* Taxable provided taxable supply requirements are all satisfied.

The sale of a property used for leasing purposes by an entity carrying on a leasing enterprise is excluded from the calculation of its projected GST turnover as the property is a capital asset of the enterprise and not trading stock. In such circumstances, an entity may not be required to be registered for GST at all, and therefore the sale of the property will not be subject to GST because not all the requirements for a taxable supply are met.

The ATO has developed a GST property decision tool (access it here). It says the tool has been designed to assist taxpayers to determine the GST implications for property-related transactions. The tool includes:

  • a series of questions to help determine the GST classification of real property transactions
  • help that provides guidance and explanations to work through the tool
  • links throughout to navigate to additional information
  • provision of a GST decision of how GST applies to the particular property transaction.

Harper Group Pty Ltd Chartered Accountants Frankston Ph 9770 1547

Disclaimer: All information provided in this article is of a general nature only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.

Michael Sinclair