When buying and selling residential properties, it is important to consider the possible tax implications on buyers and sellers before the contracts are executed.
Goods and Services Tax (GST)
GST is not applied when you sell a residential property that is your main residence. When buying an existing residential property, the sale is input taxed and not subject to GST so you cannot claim a GST credit on the purchase.
You may claim GST credits for a purchase of a new residential property and you are liable to pay GST on the purchase. If GST applies when you buy a new residential property, you pay GST on one-eleventh of the sale price. This is paid in addition to the purchase price to the seller.
You are required to register for GST if you sell property as part of your business and the business’s GST turnover exceeds the threshold. The GST turnover is based on the business’s gross income, not the business’s profit. The current GST turnover threshold is $75,000 and $150,000 for non-profit organisations.
Some sellers who sell property as part of their business and are registered for GST may elect to use the margin scheme when making a taxable sale of property. Instead of paying GST on the sale price, GST is paid on one-eleventh of the margin for the sale. The margin is generally calculated by the difference between the sale price and the amount originally paid for the property or the value of the property provided in an approved property valuation as at the relevant statutory date. You cannot claim a GST credit for a purchase made under the margin scheme even if GST was paid on the margin.
If you are claiming GST credits for a purchase, you must obtain a tax invoice. Contracts for the sale of property are not valid tax invoices, but you can check the front page of the Contract to see whether the purchase price includes GST. A tax invoice can only be provided if the sale is taxable, the seller is registered for GST and the margin scheme has not been applied.
Capital Gains Tax (CGT)
Any residential properties that were acquired on or after 20 September 1985 may be subject to CGT.
Your main residence is generally exempt from CGT. To be eligible for the main residence exemption, the property must have a dwelling on it and be used wholly or mainly for residential purposes. The sale will be subject to CGT if you rented any part of the property out at any stage, you have run a business on the property or the property is on more than two hectares of land.
Capital gain is calculated by subtracting the amount it cost you to buy the property (known as the “cost base”) from the amount you received when you sold the property (known as the “capital proceeds”) with the tax applied to the difference between the two.
If you sell or otherwise dispose of your property, the timing of the CGT event is generally when exchange of contracts takes place rather than the settlement date. If no formal contract has been entered into, then the timing of the CGT event is when the change of ownership occurs.
Different land tax obligations apply in each state and territory.
In the ACT, land tax applies to all residential properties that are rented. Land tax also applies to residential properties owned by a trust or a corporation, regardless of whether the property is rented out. Land tax is assessed on a quarterly basis and there is no pro-rata of land tax liability if the property is no longer rented out or becomes vacant during the quarter.
It is the responsibility of the owner to advise the ACT Revenue Office in writing within 30 days if a residential property that they purchase is rented or becomes rented or is owned by an individual as a trustee. Failure to do so is considered a tax default and you may incur interest and penalties in addition to the land tax payable.
You are exempt from paying land tax on your main residence. There are a number of other exemptions to land tax, which we can advise if required.
In New South Wales, you may be liable for land tax if you own a residential property that is not your principal place of residence as at midnight on 31 December each year and the taxable value of the land is greater than the land tax threshold. The current land tax threshold is outlined below:
|2014||$412,000||$100 plus 1.6% up to the Premium Threshold|
|$2,519,000 and over (Premium Threshold)||$33,812 for the first $2,519,000 then 2% over that|
Land tax is assessed based on a calendar year (1 January to 31 December) and your notice of assessment will include the value of the land of all the property you own in New South Wales at midnight on 31 December of the year prior to the current tax year.
If the total value of your taxable land is greater than the land tax threshold, you are required to register for land tax by 31 March in the tax year. Failure to do so may result in interest and penalties in addition to the land tax payable.
In New South Wales, owners are exempt from paying land tax on their principal place of residence. This exemption only applies to natural persons and does not apply to companies. There are a number of other exemptions and concessions to land tax which are outlined on the NSW Office of State Revenue website and which we can advise if requested.
What do these tax implications mean for you?
You should keep all records relating to investment properties, including documents regarding the purchase and sale of the property, costs of ownership and any capital improvements. It is also important to keep records in relation to your main residence because if your circumstances change, your property may cease to be fully exempt from tax.