GST (Goods and Services Tax) and CGT (Capital Gains Tax) are two separate tax systems that can intersect in the sale of certain properties. While GST typically does not apply to the sale of existing residential properties, it can be relevant for commercial properties, new residential developments, and properties used in a business. Understanding their interaction is crucial for accurate tax planning.
When selling a property, GST is generally excluded from the selling price for CGT purposes. This means that if GST is applicable to your sale, it does not increase the capital gain subject to CGT. Under Division 75 of the GST Act, the GST component is excluded from the property's cost base and sale proceeds. However, this exclusion does not mean GST is irrelevant; it must still be paid if applicable, and it can significantly impact cash flow and overall profitability.
A common misconception is that GST always increases the capital gain on a property. In practice, GST is a separate consideration that affects cash flow rather than the capital gain calculation itself. This distinction is particularly important for property developers or investors in commercial real estate, where GST is often applicable.
To see how this plays out, consider a commercial property in Melbourne sold for $1.1 million, including GST of $100,000. The GST-excluded sale price for CGT purposes is $1 million. If the property's cost base was $750,000, the capital gain is $250,000. At a 37% marginal tax rate, this results in a CGT liability of $92,500. The GST paid does not alter this CGT calculation but must be remitted to the ATO.
In our experience reviewing thousands of properties across Australia, one frequent oversight is failing to consider GST when setting sale prices. Investors often focus solely on CGT, overlooking the immediate cash impact of GST liabilities. Another common error is not consulting with a tax professional early in the transaction process, which can lead to unexpected GST obligations and penalties.
The answer can differ depending on your situation. For example, if you're selling a new residential development, GST is generally applicable, but the margin scheme might reduce the GST payable. For properties owned by an SMSF, both GST and CGT considerations can be more complex, requiring specific advice. If you acquired a property before 1 July 2000, GST might not be relevant at all.
Given these complexities, professional advice is crucial. A Chartered Quantity Surveyor can assess the property's depreciation and cost base accurately, while an accountant can navigate the GST and CGT intricacies specific to your situation. Together, they ensure compliance and optimise your tax outcomes.