What Property Developers Need to Know About GST

Property development can be highly profitable—but it’s also one of the most technically complex areas of Australian tax. The biggest tax issues for developers don’t usually arise at the end of a project. They show up along the way: in your BAS,  cash flow, and  years after construction is finished. So let's breaks down the key tax concepts every property developer should understand.

How GST Works

If you’re developing property to sell, the ATO will usually treat this as running a business, so GST generally applies. Selling new residential property is usually subject to GST, even if the property is rented out for a while.
Although residential rent doesn’t include GST, that doesn’t mean the later sale is GST-free. If the sale will be taxable, you  claim GST credits on your construction and development costs through your BAS along the way.
However, when you sell,  if you are eligible, the margin scheme allows GST to be calculated on the margin, rather than the full sale price.
This means GST is paid on the difference between: what you sell the property for, and what you paid for the land.
Example: Let's say you bought the land for $400,000 , cost to build was  $500,000 and you sold it for $1.3m. You only pay GST on $1.3 less $400,000 = $900,000 /11 =$81,818

Important points to keep in mind:

• The margin scheme must be written into the contract of sale
  
•  If you claimed GST when you purchased the property, you cannot apply the margin scheme.
• You don’t get GST credits on the land purchase under the margin scheme, but you can still claim GST credits on construction and development costs
  

For many developments, the margin scheme can significantly reduce GST payable and improve overall feasibility.

What If You Decide To Rent the Property?

A common scenario is where a developer builds a property intending to sell it, claims GST credits on construction, and then decides to rent the property out—either due to market conditions or a change in strategy. This is where GST often catches people off guard.

Residential rent is input taxed, which means:

• No GST is charged on the rent, and
  
• GST credits are not allowed for costs that relate to making that rental supply.
  

When a property moves from being held for sale (a taxable purpose) to being rented (an input-taxed purpose), this creates a change in creditable purpose.

A change in purpose triggers GST adjustments through the BAS.

If you previously claimed GST credits on construction costs and then rent the property out, you may be required to make an increasing adjustment. In practical terms, this means paying back some of the GST you originally claimed.

Key things developers should understand:

• Adjustments are spread over multiple adjustment periods, depending on the value of the property
  
• Residential properties often have adjustment periods of up to five or ten years
  
• Each year the property is rented, a portion of the GST claimed may need to be repaid in your BAS
  

This can result in ongoing GST payments long after construction is finished—something that needs to be factored into cash-flow planning.

What is the Five year Rule?

 If a residential property is rented out as long-term accommodation for at least five years, it’s no longer treated as “new residential premises” for GST. This means that when the property is sold, GST is generally not payable. At that point, you also can’t claim any further GST credits on the sale, and in most cases any GST adjustments from renting the property will already have been taken care of in earlier BASs.

However, simply holding or renting a property for five years doesn’t automatically make it a long-term investment. To access the 50% CGT discount, there needs to be a genuine change in intention.

The property needs to clearly move out of development activity and into a long-term rental investment. It should be held for rental income or available for rental continuously for five years, not for resale.  It must not be marketed for sale during this time. 

Where these conditions are met, the sale will generally be treated as a capital gain and may qualify for the 50% CGT discount. It’s also worth noting that companies don’t qualify for the CGT discount, so if your goal is to hold property as a long-term investment, a trust is usually the more tax-effective structure.

GST Withholding at Settlement

For sales of new residential property, purchasers are required to  withhold GST at settlement and pay it directly to the ATO. 

From a developer’s perspective:

• 7% of the contract price is withheld if the margin scheme applies
  
• Otherwise, withholding is generally 1/11th of the sale price
  
• The amount withheld is credited against your GST when you lodge your BAS
  

While this doesn’t increase the total GST payable, it reduces the cash received at settlement, which can significantly affect project cash flow. Developers must also provide purchasers with a GST withholding notice from the ATO before settlement,

Final Thoughts

For property developers, tax isn’t just about the final sale—it affects your:

• BAS during construction,
  
• Cash flow while renting,
  
• GST position over multiple years, and
  
• Eventual income tax outcome.
  

Renting out a new residential property changes the GST treatment, triggers BAS adjustments, and can reshape the tax profile of the entire project. 

The most successful developers don’t leave tax issues until the end — they plan for them early. With over 30 years of experience supporting property developers, Tolevsky Partners can help you set up the right structure and bookkeeping systems upfront, so everything runs smoothly and you can stay focused on what you do best.

Want to learn more?

Please click on the links below to view articles in our three part series on Property Development 

Part 1: The Best Structure for Property Developers
Part 2: What Property Developers Need to Know About GST
Part 3: What Property Developers Need to Know about Finance