Investing in real estate does present some opportunity for the creation of wealt

Question

Investing in real estate does present some opportunity for the creation of wealth, much like any other investment does. Taxation of rental real estate, however, does present some unique rules, and these rules can have a dramatic impact on the investor's realized gain or loss from the real-estate rental activity. Let's begin outlining the tax consequences by describing the various capacities in which an individual can own and rent real estate. Asked differently, are there distinctions in the tax law that depend on the manner in which the property is held or used, such as between those who rent real estate as a full-time business and those who merely rent a vacation home? What are the rules that we follow in telling one type of rental property or rental ownership from another?

Explanation / Answer

Residential premises are new when any of the following apply:
they have not been sold as residential premises before
they have been created through substantial renovations
new buildings replace demolished buildings on the same land.
Residential premises are no longer new residential premises if they have been continuously rented for five years after first becoming new residential premises. They may still be considered new residential premises however, even if they have been rented out continuously for five years where they have been held for a dual purpose. Dual purpose is where the premises are being, for example, marketed for sale whilst being rented out as an input taxed supply. That is because they have not have been held 'solely' for making input taxed supplies for at least five years.
You can claim GST credits for any purchases you make for the sale of new residential premises (subject to the normal rules on GST credits) and you are liable for GST on the sale.
If your residential premises are no longer new, for example, they have been rented for more than five years, they are input taxed.
If GST applies to your sale of new residential premises, you generally pay GST of one-eleventh of the sale price. You may be eligible to use the margin scheme to work out the GST you must pay (see Margin scheme for eligibility).
If you rent new residential premises before you sell them
If you build new residential premises for sale, you can claim GST credits for the construction.
If you rent the new premises while you are planning to sell them, you will need to adjust part of the GST credits you claimed.
You must show you intend to sell the premises. Actively marketing the premises for sale is one way of showing this.
Example: Renting before sale
Helki plans to sell a new residential property she has built.
The property has been on the market for some months, so Helki decides to both:
rent it out
continue to actively market the property for sale.
Helki must adjust part of the GST credit she previously claimed because her use of the property has changed from the way she originally intended. That is, she originally intended to sell the new residential premises, however, she is now renting out whilst trying to sell the residential premises. This is known as a change in creditable purpose, she is therefore not entitled to the full credit.
New residential premises 'off-the-plan'
An off-the-plan purchase occurs when you enter into a contract to purchase new residential premises before the construction is completed. At this stage you are purchasing a contractual right to have the premises built.
Generally, you pay a deposit and sign a contract with the developer. You pay the balance of the purchase price on settlement.
On settlement, you are purchasing new residential premises and the purchase price will include GST.
However, if you sell the contractual right before settlement you are not selling new residential premises, and GST may apply if the sale of the contractual right forms part of your GST registered business.

The sale of an off-the-plan property may be an enterprise in its own right and may form part of your GST registration threshold.

For more information about selling new residential premises and adjusting for GST credits, refer to:
GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose
GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises?
GSTR 2000/24 Goods and services tax: Division 129 - making adjustments for changes in extent of creditable purpose
Property and Construction Industry Partnership - issues register
section 11 - non-commercial residential premises
section 04 - adjustments for input tax credit claims
section 12 - off-the-plan sales.
Existing residential premises
You cannot claim GST credits for anything you purchase for the sale of existing residential premises and you are not liable for GST on the sale.
If you sell residential premises, they are input taxed unless the property is new (see New residential premises).
If you own premises and they are used for residential and commercial purposes, GST may apply (see Commercial residential premises).
If you purchase existing residential premises, the sale is input taxed, so you cannot claim a GST credit on the purchase.
Example: Mixed supply
Estella sells a two-storey building which has commercial business premises downstairs (a taxable supply) and residential premises upstairs (an input taxed supply). This is a mixed supply.
Rent or bonds from residential premises
Rent
If you lease residential accommodation, the following applies:
you are not liable for GST on the rent you charge
you cannot claim GST credits for anything you purchase or import to lease the premises.
Bonds
If you receive a bond or security deposit for leased residential premises, the following applies:
you are not liable for GST on the bond or security received
you cannot claim GST credits for anything you purchase or import to lease the premises.
Commercial residential premises
Commercial residential premises include:
hotels, motels, inns
hostels, boarding houses
caravan parks, camping grounds
establishments that provide residential premises that are similar to hotels, motels, inns, hostels and boarding houses.
Commercial accommodation is accommodation in these commercial residential premises.
If you sell commercial residential premises such as hotels, motels, inns, hostels or boarding houses, you are generally making a taxable sale and you are liable for GST of one-eleventh of the sale price.
You may also sell commercial residential premises in either of the following ways:
under the margin scheme (see Margin scheme)
as a going concern (see Going concerns).
You can claim GST credits on purchases you make that relate to selling your property (subject to the normal rules on GST credits), for example, the GST included in real estate agents' fees.
If you purchase commercial residential premises, you can claim the GST included in the purchase price of the property as long as either:
the seller did not use the margin scheme to work out the GST included in the price
the sale was not a GST-free sale of a going concern to you and the seller was registered or required to be registered for GST.
You may also be able to claim a GST credit on other expenses, such as solicitor's fees, that relate to buying the property.
Some characteristics of commercial residential premises include:
multiple occupancy
central management
providing accommodation to paying guests.

For more information about the characteristics of commercial residential premises, refer to GSTR 2000/20 Goods and services tax: commercial residential premises.
If you lease commercial accommodation
As a general rule, if you are registered (or required to be registered) for GST, you are liable for GST on any commercial accommodation you lease to others.
The amount of GST you are liable for depends on whether you provide short-term, long-term, or predominantly long-term accommodation.
Short-term accommodation
You provide short-term accommodation when a guest stays for less than 28 continuous days.
If you provide short-term accommodation, you are liable for GST of one-eleventh of the price you charge on the accommodation.
Long-term accommodation or predominantly long-term accommodation
You provide long-term accommodation when a guest stays for 28 or more continuous days.
You provide predominantly long-term accommodation if at least 70% of the individuals you provide commercial accommodation to, stay for 28 or more continuous days.
If you provide long-term accommodation that is not predominantly long-term accommodation, you can choose to do either of the following:
you can work out GST on
the normal GST-inclusive price for the first 27 days in the same way as short-term accommodation
half the GST-inclusive price from the 28th day of the stay- this is called the 'GST concessional treatment'
treat all long-term accommodation sales as input taxed in the same way as you would treat residential rent - this means you
are not liable for GST on the income
cannot claim GST credits.
Example: Using the concessional treatment method
John accepts a transfer to Perth for six months. He stays the whole time at Sun Towers, a hotel that usually provides short-term accommodation.
Sun Towers usually charges $220 a night, including GST.
For the first 27 days of his stay, John pays the normal rate - that is $220 ($200 plus 10% GST).
From day 28 onwards, Sun Towers works out GST on half the usual GST-inclusive price (that is, $110). It adds GST of $11 (10% of $110) to the normal GST-exclusive charge ($200) to arrive at the price.
Therefore, Sun Towers charges John the following:
$220 a night for the first 27 days
$211 a night for the rest of his stay.
If you provide predominantly long-term accommodation, you can choose to do either of the following:
work out GST on half the GST-inclusive price from the beginning of the stay - this is called the 'GST concessional treatment'
treat all long-term accommodation sales as input taxed in the same way as you would treat residential rent - this means you
are not liable for GST on the income
cannot claim GST credits.
Example: Using the concessional treatment method for providing predominantly long term accommodation
Moon River Motel provides predominantly long-term accommodation.
The standard short-term room rate is $66 a night, that is, $60 plus $6 GST.
To calculate the GST, Moon River halves the GST-inclusive price of $66 to $33 and calculate10% of $33 (that is, $3.30). It adds GST of $3.30 to the GST-exclusive rate of $60 and so actually charges long-term occupants $63.30 a night.
Under the concession, Moon River Motel is liable to pay $3.30 to us for each night of long-term accommodation it supplies. If the concession did not apply, the normal GST would be $6.

For more information about how you may apply special rules to reduce the value you work out your GST on, refer to GSTR 2000/20 Goods and services tax: commercial residential premises.
GST concessional treatment
As a general rule, you can apply GST concessional treatment to items you provided as part of the cost of long-term accommodation. These include any of the following:
electricity, gas, air conditioning and heating
room cleaning and maintenance
phone, television and radio.
However, if you charge a fee for incidental items (for example, meals, personal laundry, in-house videos, mini bar or phone calls), you cannot apply GST concessional treatment to these items. You must apply the full GST rate of 10%.

For more information about GST and commercial accommodation, refer to GST and commercial accommodation - completing your activity statement (NAT 10813).
If you lease your holiday apartment or unit
You make an input taxed supply if you lease your apartment or unit to either:
a guest
a management company (that will use it as part of commercial residential premises).
This means you:
are not liable for GST on the income
cannot claim GST credits for anything you purchase or import to lease the premises.
Example
Aiko owns a strata titled apartment. When she leases her apartment to Mink Management Services (MMS) the supply is input taxed.
MMS will group Aiko's apartment with other apartments in a complex and let them out in the same manner as a hotel, motel, inn or hostel would.
Even though Aiko's apartment is located within commercial residential premises, her apartment does not, by itself, have the characteristics of commercial residential premises. It is residential.
This means Aiko:
is not liable for GST on the income
cannot claim GST credits for anything she purchases or imports to lease the premises.

For more information about leasing long-term commercial residential premises, refer to:
GSTR 2000/20 Goods and services tax: commercial residential premises
Property and Construction Industry Partnership - issues register - section 10 - leased or rented property.
If you sell your holiday apartment or unit
If you sell your apartments, they are:
residential premises
input taxed, regardless of whether they are located within commercial residential premises.
This means you:
are not liable for GST on the income
cannot claim GST credits for anything you purchase or import to make the sale.

For more information, refer to:
GSTB 2001/2 Accommodation in caravan parks and camping grounds
GSTB 2001/3 Simplified calculation of input tax credits for caravan park operators.
Commercial premises
If you sell commercial premises, such as shops and factories, you are generally liable for GST on the income.
You can claim GST credits on purchases you make that relate to selling the property (subject to the normal rules on GST credits), for example, the GST included in real estate agent's fees.
If you sell commercial premises, you may be able to use the margin scheme to work out the GST that applies to the sale. Using the margin scheme means your GST liability is equal to one eleventh of the margin for the sale of property, rather than one eleventh of the total selling price (see Margin scheme).
If your commercial premises is being leased when you sell it, you may be able to treat it as a GST-free sale of a going concern (see Going concerns).
If you purchase commercial premises to use in your GST registered business, you can claim the GST included in the purchase price of the premises. You may also be able to claim GST on other expenses that relate to buying the property, for example the GST included in solicitors' fees.
You cannot claim GST credits if any of the following apply:
the seller used the margin scheme to work out the GST included in the price
you purchase property from someone who is not registered or required to be registered for GST
you purchase the property as a GST-free supply
you are not registered or required to be registered for GST.

For more information about GST and property, refer to
GSTR 2000/28 Goods and services tax: attributing GST payable or an input tax credit arising from a sale of land under a stan

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