GST Treatment on Property Development

A common part of property development that we find overlooked is the GST treatment for a property development. This can be a very simple item to address, or in some scenarios can be a touch more complicated. Below we have partnered with BetterCo Advisory and Accounting to cover all you need to know about GST for property development.

To preface the below, you should always seek tax advice from your accountant and the below is not considered to be tailored advice.

What is GST?

GST stands for Goods and Services Tax. It was bought into law in 1 October 1986. This is a tax that is payable on any traded goods or services. The current GST rate is 15%.

There are some exempt items from GST, such as finance costs, these do not attract any GST. However, 99.9% of what you pay for will attract GST.

When you purchase an item, normally the price you see will include GST. You pay this amount and the GST portion is then paid by the vendor to the government. The vendor, however, can also claim GST on the items it needs to purchase for its business. Normally a business will file a GST return where it will either pay or claim GST based on the net figure between what it has paid in GST vs what it has claimed.

How does it apply to property development?

If you are developing property for sale, this is considered a taxable activity. Because your intent is to sell the units on completion the IRD will consider this a provision of goods to the market and therefore tax it appropriately. In short, you will be required to pay GST to the IRD on your sale revenue.

This, however, also means that you can claim GST on the costs for the property development. When you incur your monthly bills, you will need to pay the full GST inclusive amount to your suppliers / builders etc., however, may claim the GST portion as a refund from the IRD in your next return.

It is important to note that if you are building to hold then this is not considered a taxable activity. As you are not selling then there is no GST to pay on revenues and consequentially you also cannot claim GST on the expenses.

This is important to identify as when you are putting together a feasibility for your project you should be consistent with your cost items to either have them all inclusive of GST or exclusive depending on your intended outcome for the development.

What if I am keeping some and selling some of the properties?

This is where things can get interesting. If you are intending on selling only a few of the properties in a development and retaining the rest you may end up registering partially for GST.

This can take on different shapes, however, often the GST amount is reflective of what you are holding and selling. We typically see this relative to the land share of what is being sold. For example, if you have a 1,000 sqm property that you are dividing into 10 even parcels of 100 sqm then each property accounts for 10% of the land. If your intent was to sell 3 of the 10 properties on completion then you would register to claim 30% of the GST expense throughout the development.

Importantly, you would pay 100% of the GST raised on the sale of those 3 properties.

Why is the lender asking me to register for GST?

GST is a tricky space to navigate and some lenders, particularly in the non-bank space, will often anchor their stance on one side of the fence or the other. If the client intends on holding the properties on completion but is working with a non-bank lender and that ability to hold on completion is uncertain they will often ask the borrower to claim GST or work on an exclusive of GST basis for the purposes of their funding.

The reason for this is that if there is an event of default the lender does not want to be in a situation where they sell the properties and then need to pay the IRD (who will rank ahead of them) thus arbitrarily increasing their true LVR and putting funds at risk.

When should I register for GST?

As early as possible – if you are selling on completion. Identifying your plans for a development early is important. There is nothing wrong with registering for GST later, however, if you do so you may risk not being able to fully claim the GST on previous expenses.

Whilst there isn’t a hard and fast rule, if you register for GST and seek to claim GST on items that you paid for > 12 months ago the IRD may split this claim over multiple periods / tax years. This can be particularly troublesome if you require those GST funds as equity in the project.

If you are undecided on whether you are going to sell or hold, it is best to talk to an accountant first so they can get the timing and calculations right for you. This is important as there are possible Income Tax consequences for you if you don’t get it right. And you remove the accountants ability to help you minimise your tax burden.

What is a good GST cycle?

When registering for GST you can pick your return cycle (how often you are going to file a GST return). This can be monthly, bi-monthly, quarterly, or 6 monthly. or even annually. Whilst your initial thoughts might be to spread these out to save on a regular burden and cost of filing returns it is normally better to register for monthly returns.

The reason for this is when you get into the development of the properties you will have large monthly costs. You are required to pay the full GST inclusive amounts and then claim the GST back in your next return. Leaving a longer return cycle means there is a longer period between your GST claims and therefore a greater amount of GST you will have to cover (i.e. 2 – 3 months + of GST as opposed to 1 month).

You can change your GST cycle with the IRD and that will often happen where some clients might be a on a longer return cycle when they are consenting a property as the monthly bills are low and sporadic before shifting to a more regular cycle for the development. It is important to note, however, that you can only change your GST cycle at the end of the current cycle you are in. This is crucial to understand as if you are on a 6 monthly cycle and only 2 months in there is 4 months before you can change your return cycle. So a good hedge is to register for 2 months from the start and then change to monthly.

How do I fund the GST?

When arranging a loan for a development where you have claimed GST the funder will pay out only the GST exclusive amount of each invoice under their core development facility.

This leaves a gap of the GST amount, which on a larger development can add up to be a significant amount of money. Some lenders will not provide any assistance for this and therefore the developer will need to run a float to cover the GST.

Some lenders, however, will provide a GST facility independent of their development facility to fund this. This works similar to an overdraft where the GST component of the monthly invoices are drawn from this credit line and then it is repaid with the GST return. For this reason most lenders will require you nominate the lenders account with the IRD for the GST returns to ensure that the money flows in.

That is a broad summary of how GST works with property development. If you have any questions we are happy to help but also recommend you contact your accountant to get some professional advice.