GST Withholding – Be Aware

A thoroughly boring topic this week, but an important one nonetheless. The application of GST to property transactions is complex and unfortunately not clearly defined as to when GST should apply. If it is established that GST should apply, how it is to apply becomes an additional complication.

It is important for sellers to know that they may have a GST liability when disposing of property if it is vacant land, new property being sold for the first time or if they are considered to be conducting an enterprise when carrying out the sale.

Sellers of residential real estate are normally exempt from paying GST upon the sale of their property. Sellers are not required to be registered for GST when selling their family home or for a rental property that receives or received residential rent.

However, sellers who acquire property for the purpose of ‘enterprise’ then they may carry a GST liability and the GST Withholding provisions may also apply whereby either 1/11^th or 7 percent of the purchase price (when using the Margin Scheme) is withheld by the buyer who must remit it directly to the ATO at settlement.

Often, sellers are uncertain if they have a GST liability or not when disposing of property. Generally, sellers are only required to register for GST if their activities are considered an enterprise. This measure is all about intention. If it was your intention to acquire a property, make improvements to it and rent it out then this is probably not an enterprise.

However, if you acquired land with the intention of making improvements to the house, subdividing the land and selling for profit in an expedient manner, then you have probably conducted an enterprise and should be registered for GST, particularly when the taxable supply exceeds $75,000.

If it is established that GST applies to the contract then how the GST is to apply should also be pre-determined; is it the Margin Scheme, Full GST or Going Concern? For example, in the event a residential property that includes a business enterprise as part of the sale or a leased commercial premises is sold, then the supply is a Going Concern and GST free.

The GST withholding provisions apply when the property is a new residential premises or is potential residential land. There are specific definitions under these two categories but generally, a newly created vacant lot is considered potential residential land. It could be the seller will not have a GST liability in selling off their back yard but that doesn’t necessarily preclude the buyer having to remit 1/11th of the purchase price to the ATO at settlement. It is then up the seller to prove to the ATO they’re not conducting an enterprise and get the 10 percent back from them after settlement.

The introduction of the GST Withholding provisions has added an additional layer of complication to property transactions and your real estate agent (including me) are unable to provide you specific advice about it. Your accountant is best placed to assist you.

Please note that the above does not constitute financial or legal advice so don’t rely on it when making decisions about the disposal of property.