Making a profit from buying and selling a property has long been an attractive money making option. However, there are a number of tax considerations which could reduce its attractiveness.
The main issues are to do with GST – whether sellers need to be registered for GST and how much they are liable for.
GST registration
Anyone in property development or the business of buying and selling property, is required to be registered for GST, even if it is an ‘isolated transaction’ with a profit-making purpose.
If the transaction is a ‘mere realisation’ of a capital asset, the seller is not required to be registered, and no GST is payable on the sale.
Generally the sale of the family home would not require the owners to be registered for GST.
GST payable
Once registered, the seller must pay GST, which is calculated on the amount received for the property, generally 1/11th of the sale price.
An alternative method to calculate the GST payable is called the ‘margin scheme’ which means, if all conditions are met, that the GST payable is calculated on 1/11th of the ‘margin’.
In simple terms, the margin is the difference between what the property was bought for and what it was then sold for (excluding additional costs). It is important to note that the margin is not a profit concept.
Using valuations
These rules apply for any property purchased after 1 July 2000. If the property was purchased before this date, a valuation of the property at this date may be used for the purposes of calculating the margin.
Using the market scheme can result in substantially less GST payable by the purchaser.
Going concern exemption
Where commercial property is sold which is leased at the time of completion, then subject to certain conditions, the property can be sold GST free under the going concern exemption.
Anyone involved in complex property transactions, for example, where a property has been inherited, developed, subdivided or amalgamated should seek advice to ensure they are eligible to use the margin scheme.
