Ask Ban Tacs Question
My wife and I purchased in our names a property last May. It had a derelict house which we have demolished and we are currently subdividing into 3 blocks we are looking at keeping 1 with intention of building a home for us to retire into. Are we subject to gst withholding? This is the first time we have subdivided property.
Answer
First of all I want to be very clear that GST withholding is just a method of collection not necessarily whether GST is payable. The trouble is if the buyer doesn’t withhold when they should have then they are personally liable for the GST so if your buyer has a good conveyancer they are going to be very careful about this. If you can’t convince them GST does not apply then the sale could fall through while you are going through the arduous process of getting a ruling from the ATO. Alternatively, you let them withhold and then you have to convince the ATO that GST does not apply and try to get the money back. There has been a recent case that the ATO lost and they had to give the GST back but really, you don’t want that battle.
So when do you have to charge GST?
This is the sale of vacant residential land so it is subject to GST (and GST withholding) if the seller is registered or required to be registered for GST. While this is stating the obvious, that is the key. Are you registered for GST? You or your wife might be individually but this property is jointly owned, so that is the “enterprise” the partnership between you two. Are you jointly registered for GST? If so the gig is up but I doubt you are so onto the next question.
Are you required to be registered? If your turnover from supplies you make that are not input taxed exceeds $75,000 then you are required to be registered for GST reference section 23-5. Residential rental income is input taxed so even if you and your wife jointly own residential rental properties the rents will not count in the $75,000, reference section 118-15. Note that it is $75,000 in turnover, section 185-25 states that turnover does not include the sale of a capital asset. So the question here is whether the lots are part of your business turnover or merely held as a capital asset.
If you purchased the whole block because you wanted to live there but didn’t want all that land the subdivision it could be considered merely realising a capital asset. To be merely realising an asset you can’t be too business like. Don’t do anything more to the lots than the minimum required by council. In MT 2006/1 https://www.ato.gov.au/law/view/document?DocID=MXR/MT20061/NAT/ATO/00001 paragraph 273 Tobias was subject to GST because he built a duplex rather than just cut off the land. There was also his profit making motive because that was the only way he could afford to own a home in the area. Note when the ATO say entitled to an ABN that means GST applies.
“Example 29
273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.
274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.
275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.
276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.”
The other side of the argument – merely realising an asset, no GST an example from MT 2006/1. Unfortunately, all the examples in this area are from long term holds but don’t give up here, I have seen positive private rulings where the property was recently purchased.
“Example 33
291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.
292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.
293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.”
To counter the short term hold you need to be able to argue the property was purchased primarily for your home not with the plan to profit from the sale of the lots. That is why all the examples where GST does not apply are long term holds as that shows there was another primary purpose for purchasing the block, not for profit making by subdivision and sale.
Consider your intention when buying the property was it all about profit making or was it to build your home in the location you wanted. From MT 2006/1 – an enterprise means GST applies
“Land bought with the intention of resale
270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.[111]”
Don’t be discouraged, twice now I have seen private rulings get through where the person argued regarding a recent purchase, that they were just reducing the land area because they didn’t want the maintenance. No profit making intention and nothing business like as they just did the bare minimum to cut off the land.
I am giving you all the detail here because I don’t want anyone talking you into registering for GST anyway and blowing your chance. You are probably going to get the same price for those blocks whether you have to pay GST to the ATO or not. Further, you might decide to go to the ATO for a ruling (form attached) so I am giving you your detailed arguments.
Hoping for the best is not the best option, even if you can convince the buyer’s solicitor. The ATO could come along later and decide GST should have applied and by that time the 4 year amendment period may have expired on claiming back the GST on the subdivision costs. But most expensive off all you may have lost the opportunity to enter into a margin scheme agreement with the buyer. A margin scheme clause in the contract will allow you to only pay GST on the difference (margin) between the price you paid for that section of the block and the selling price. You can’t put a margin scheme clause in the contract just in case, once there is a margin scheme clause agreed to then you are admitting GST applies and the buyer has to withhold.
So there is a lot at risk and with data matching your chances of slipping under the radar are not good. I know I am not directly answering your question. My advice would have to be go to the ATO for a ruling because there is a reasonable chance they will agree you are not an enterprise, just merely realising an asset and if that is the case it will save you a lot of money. But there is a real risk that they will say GST applies and if so there is also a fair bit of money to be saved by making the most of this knowledge, claiming back the input credits while you can and utilising the margin scheme.
Budget tip – at the very least get the blocks on individual titles before 1-7-2027 so you can get the 50% CGT discount on the highest possible value, if CGT does apply.
Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice on your particular circumstances.
