Home renovation shows have been hot property on television screens across the country for quite a few years now. They have evolved from experts explaining some of their best but simplest DIY tips to ‘average people’ project managing major renovation projects. They make it look so easy (aside from the occasional emotional outburst) that it seems like everyone has a plan to renovate at some stage in their property ownership life.
But what are the Goods and Services Tax (GST) implications if you decide to turn your habit of upgrading the family home into a more commercial venture via property development?
If the ATO classifies you as a ‘personal property investor’ – namely that your renovations are simply improving a property that you plan to rent out rather than sell for profit – then you are unlikely to have to pay GST even if you do decide at a later stage to sell the property.
If you intend to buy, renovate and sell a property for a profit, the ATO will almost certainly classify you as a carrying on a renovation as a profit making activity – even if you are living in the property during the renovation process and classify it as your home. In this situation, you may be required to register for GST if the proceeds from the sale push you over the GST minimum threshold (which is currently $75,000 per year. In this situation, you would be able to claim all the GST you paid to suppliers and contractors as a GST credit to offset against your GST liability from the sale.
If you are running a renovation business (namely that you are buying, renovating and selling multiple properties in an ongoing, business-type manner) then the properties will be classified as trading stock until they are sold. Costs associated with the renovations will be most likely classified as forming part of the cost of trading stock, in which case they will be deductible from the sale, rather than as a reduction at the time they are made. Because you are carrying on a business, you are likely to be over the GST threshold, so you will be able to claim GT credits and have GST liabilities.
Another point to consider is that similar criteria will apply if you are building a new home or homes with the intent to sell for a profit. You will likely be able to claim GST credits and will pay GST on the sale of the property.
Why is it important to understand your possible GST obligations before selling? Because if you don’t factor the GST of 10% into the sale price, your potential profits will take a sizeable hit if the ATO determines that you are renovating for profit or running a renovating or developing business.
By Jennifer Lowe