Property development generates more GST complexity per transaction than almost any other sector. A single residential project touches new residential premises rules, the margin scheme election, GST withholding by the buyer, input-taxed acquisitions, and borrowing cost capitalisation — all before a single settlement has occurred. Bookkeepers who treat development projects like standard commercial sales will create errors that compound over a two-to-five year project cycle and are expensive to unwind at year end.
GST on New Residential Premises: The Fundamental Distinction
Under Division 40 of the GST Act, the sale of new residential premises is a taxable supply — GST applies at 10% on the contract price. The sale of existing residential premises is input-taxed: the vendor does not charge GST, and cannot claim input tax credits on costs directly related to the exempt sale.
The word "new" carries a specific definition. Residential premises are new if they have not previously been sold as residential premises, or if they have been substantially renovated. A substantial renovation under s.40-75(1)(b) of the GST Act means the renovation has replaced or altered substantially all of the building's structural components — not just cosmetic updates. Replacing a kitchen and bathrooms while leaving the structure intact is not a substantial renovation; replacing walls, floors, roof structure, and plumbing throughout the building likely is. This distinction determines whether a renovating developer charges GST or sells input-taxed.
For mixed developments — a building with commercial ground-floor tenancies and residential apartments above — an apportionment is required between taxable and input-taxed supplies. The apportionment method (floor area, sale value, or another reasonable basis) must be consistent and documented.
The Margin Scheme: When to Use It and How to Calculate It
The margin scheme under Division 75 of the GST Act reduces the GST payable on a property sale to 1/11th of the margin (sale price minus acquisition cost), rather than 1/11th of the full sale price. The saving is material when the acquisition cost is high relative to the sale price.
The margin scheme is available when the vendor acquired the land in circumstances that mean full GST was not paid on the acquisition. Typical qualifying acquisitions include: purchase from a private vendor who sold input-taxed residential premises, purchase of pre-GST property (held since before 1 July 2000), or purchase using the margin scheme itself.
Two critical compliance points. First, the election to use the margin scheme must be agreed in writing between the vendor and buyer before settlement — it cannot be made retrospectively. This is typically included as a special condition in the contract of sale. A missed election is not curable after the fact; the ATO has no discretion to allow late elections under s.75-5 GST Act.
Second, the acquisition cost used in the margin calculation is the GST-inclusive consideration paid. If the developer purchased land for $800,000 and sells the completed dwelling for $1,500,000, the margin is $700,000 and the GST is $63,636 (1/11th of $700,000). Without the margin scheme, GST would be $136,363 (1/11th of $1,500,000). The difference is the developer's saving.
Construction Capitalisation: WIP Through to Settlement
All costs incurred during the construction phase must be capitalised as work in progress under AASB 116. This includes: building materials and labour, architect and engineering fees, council application and approval fees, statutory compliance costs, and — under AASB 123 — borrowing costs directly attributable to the construction of a qualifying asset.
Under AASB 123, borrowing costs (interest on the construction loan) are capitalised into the cost of the WIP asset from the commencement of construction until the asset is substantially complete and available for its intended use. Capitalisation ceases at practical completion, not at settlement. If a developer completes a building in March but settles in August, interest from April to August is an expense — not added to WIP.
WIP is released to cost of sales at settlement, not at practical completion. Revenue is also recognised at settlement. The matching principle is preserved: COGS and revenue hit the P&L in the same period.
GST Withholding: The Cash Flow Surprise Since July 2018
Under the Treasury Laws Amendment (2018 Measures No. 1) Act 2018, buyers of new residential premises are required to withhold the GST component of the purchase price and remit it directly to the ATO. The buyer retains 1/10th of the contract price (or 7% for margin scheme sales, reflecting the lower effective rate) and pays it to the ATO on or before settlement. The developer receives only the balance.
This creates a cash flow impact that many developers fail to plan for. A developer who contracts to sell a unit for $1,100,000 will receive $990,000 at settlement — the buyer pays the $110,000 GST directly to the ATO. The developer cannot access that $110,000 to fund construction or other costs. It will be offset against the developer's BAS liability for the period, but if the BAS is lodged on a quarterly cycle, the offset may not occur for weeks after settlement.
Developers must notify buyers of their withholding obligation before settlement using the approved ATO form. Failure to notify is a separate penalty offence. The bookkeeper should flag notification obligations as part of the pre-settlement checklist for each lot.
Pre-Sales Deposits and Revenue Recognition
Pre-sales deposits — typically 10% of the contract price paid on exchange — are held in a solicitor's trust account until settlement. They are not revenue of the developer. They should not appear in the developer's income statement until settlement occurs and the amount is released from trust.
If a pre-sales campaign generates $2,000,000 in deposits across 20 contracts, those amounts sit in the solicitor's trust ledger, not in the developer's books. The developer may need to disclose the contracts as contingent revenue in notes to the financial statements, but recognition occurs at settlement.
End-of-Period Checklist for Property Developer Bookkeepers
- Confirm GST treatment for each lot: new residential premises (taxable), existing premises (input-taxed), or substantially renovated premises (taxable if threshold met)
- Verify margin scheme elections are in each relevant contract of sale before settlement; flag any contracts approaching settlement without the clause
- Reconcile WIP balance to construction progress reports; confirm AASB 123 interest capitalisation has ceased for completed buildings
- Check settlement statements for each settled lot: confirm the buyer withheld GST under the withholding regime and remitted to ATO; reconcile to the BAS credit
- Review pre-sales deposit balances with the solicitor's trust statement; confirm no amounts have been incorrectly recognised as revenue prior to settlement
- Calculate any apportionment for mixed-use buildings and confirm the methodology is consistently applied across the project