GST & Investment Property

 Since July 1, 2000, almost everything we buy, sell or rent is affected in one way or another by the Government's new Goods and Services Tax (GST). But as simple as a GST of 10% may sound, its implementation in relation to investment property is not so simple. The rules differ between residential and commercial (or more accurately non-residential) investment property and even between new and previously owned residential property. While not all of the new rules are set in stone, the following is our assessment of the points that are most pertinent to property investors. You should consult the Australian Tax Office (phone 13 24 78) and/or your accountant for more precise detail.

Residential Property

In general, residential property is "input taxed" in relation to GST. This means that you can not charge GST on the rent or sale of the property, but of course you can not claim any GST credits that you may pay on the rental expenses or purchase costs. The costs of maintaining a residential property (i.e. repairs, cleaning, real estate commissions, painting, insurance, management fees, etc) is all subject to GST. The only way you can recover the increased costs is through higher rents and a higher sale price, both of which are subject to market forces. On a more positive note, water, sewerage and council rates are GST free. What's more, loan interest and many loan costs are not subject to GST because financial institutions are input-taxed, however, mortgage insurance and any related legal fees are subject to GST.

In contrast to the purchase of a pre-existing property, a new residential property is subject to GST because the builder or developer must be registered for GST, as they would be carrying out that activity as part of their business. The expected increased cost of new properties as a direct result of the GST has been estimated at between 5 and 10%. First-home buyers may be able to claim up to $7,000 to compensate for the anticipated increase in prices, irrespective of whether they purchase a new or pre-existing property.

Commercial Property

The sale and rent of industrial and commercial properties are subject to GST, but of course in these cases, the investor can claim tax credits for any GST paid on inputs (maintenance, management fees, cleaning, etc). GST also applies to commercial residential properties such as hotels, motels, inns, hostels and boarding houses, but it is not always easy to classify whether a property is residential (and input-taxed) or commercial residential (and subject to GST).

The Australian Tax Office has recently released a Goods and Services Tax Ruling (GSTR 2000/20) which sheds some light on the matter.  For example, in the eyes of the tax office, "strata, or other separately titled premises used as holiday accommodation are not usually commercial residential premises".  The key issue here seems to be that the majority of the casual letting in such premises is carried on by agents, on behalf of unit owners. The agents may either be real estate agents, operating from separate premises, or on-site agents, who may also act as the managers of the complex.

The most common arrangement for on-site agents, is for an entity to purchase management rights from the complex’s body corporate, or owners’ association, then sign individual letting agreements with the apartment owners who wish to let their properties. These letting agreements are similar to the agreements between real estate agents and property owners for ordinary house or flat rental. The rights conferred by these agreements are not sufficient to enable managers to operate commercial residential premises because they do not allow the agent to let the rooms as principal in their own right, rather than on the owner’s behalf.

Owners who supply their units for accommodation through agents are supplying residential premises. An individual unit of accommodation, such as a room, suite, apartment, cabin or villa does not possess the characteristics that are shown by a hotel, motel, inn, hostel or boarding house.  Even where an owner holds several strata units within one complex and lets them through an agent under letting, or similar agreements, these supplies are usually also of residential premises.

The bottom line is that, if you own a holiday apartment and let it through a local real estate agent or through an on-site agent, you are not letting commercial residential premises.

GST & Property Investment Analysis

A question that users of our Property Investment Analysis (PIA) software are interested in is "What changes will be necessary to the programs to accommodate the GST?" The answer at this stage would appear to be minimal. Apart from changing to the new tax scales that come into force on July 1, 2000, most of the changes will be to user inputs such as property expenses rather than to the underlying financial or tax model.

As residential investment property is input-taxed, the GST paid on inputs cannot be used as tax credits and simply represent an increase in costs. Naturally, residential investors will be looking to increase rents in line with the increased costs, but these are subject to market forces. Thus user input to the PIA software when calculating the after-tax cash flows for a residential investment property should include any GST paid on the inputs.

For non-residential investment property where GST is applicable on the rental income, the end result should be cash-neutral. This means that any GST received on the rents less any GST paid on the inputs is simply passed on to the Government within 21 days of the end of each tax period (for most investors, this will be quarterly). Thus, to calculate the after-tax cash flows for a non-residential property, the simple answer would be to exclude all GST receipts and payments from the inputs into the program.

One area that has yet to be clarified at the time of writing is in relation to stamp duty. Stamp duty on mortgages may be removed but stamp duty on the purchase price will still remain. At this stage it is not clear whether the latter is based on the GST-inclusive price of the property, which would make stamp duty a "tax on a tax".

Investment Property GST Check List

The following is a guide to which items related to property investment will be subject to GST. Items that are "GST Free" are those that the supplier cannot charge GST but for which they can themselves claim tax credits on their own inputs in providing those items (e.g. council water charges). It would be reasonable to expect that the prices of GST-free items to reduce after the introduction of a GST.

Items that are "GST Exempt" are those that the supplier cannot charge GST but for which they cannot claim any tax credits. While no GST is charged, it would be reasonable to expect the price of these items to increase because of increased costs.

Items which have "GST Included" would be expected to increase in price, but not necessarily by the full 10% compared to their pre-GST cost.

Item

GST Status

Included

Exempt

Free

Purchase of pre-existing residential property  

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Purchase of new residential property

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Purchase of commercial property

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Residential rents  

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Commercial rents

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Council rates    

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Council water charges    

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Council sewerage/septic charges    

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Interest payments  

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Mortgage account fees  

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Establishment fees  

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Mortgagee stamp duty

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Mortgagee insurance

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Mortgagee solicitor's fees

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Valuation fees  

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Registration on mortgage

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Registration on title

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Search fees

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Property insurance

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Renovations

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Maintenance

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Cleaning

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Agent's commission

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Management fees

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Conveyancing fees

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Furniture package

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Body corporate fees

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Commercial-Residential Property and the GST

While GST now applies to rents from commercial residential properties such as hotels, motels, inns, hostels and boarding houses, it is not always easy to classify whether an investment property (e.g. a holiday unit or a serviced apartment) is residential (and input-taxed) or commercial-residential (and subject to GST).

The Australian Tax Office has recently released a Goods and Services Tax Ruling (GSTR 2000/20) which sheds some light on the matter.  For example, in the eyes of the tax office, "strata, or other separately titled premises used as holiday accommodation are not usually commercial residential premises".  The key issue here seems to be that the majority of the casual letting in such premises is carried on by agents, on behalf of unit owners. The agents may either be real estate agents, operating from separate premises, or on-site agents, who may also act as the managers of the complex.

The most common arrangement for on-site agents, is for an entity to purchase management rights from the complex’s body corporate, or owners’ association, then sign individual letting agreements with the apartment owners who wish to let their properties. These letting agreements are similar to the agreements between real estate agents and property owners for ordinary house or flat rental. The rights conferred by these agreements are not sufficient to enable managers to operate commercial residential premises because they do not allow the agent to let the rooms as principal in their own right, rather than on the owner’s behalf.

Owners who supply their units for accommodation through agents are supplying residential premises. An individual unit of accommodation, such as a room, suite, apartment, cabin or villa does not possess the characteristics that are shown by a hotel, motel, inn, hostel or boarding house.  Even where an owner holds several strata units within one complex and lets them through an agent under letting, or similar agreements, these supplies are usually also of residential premises.

The bottom line is that, if you own a holiday apartment and let it through a local real estate agent or through an on-site agent, you are not letting commercial residential premises.

 

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