With numerous transaction costs in Australia making moving home less attractive, many people are switching to substantial renovations of their existing properties. However, if circumstances change in the five years following renovation, sellers must be aware of the unexpected Goods and Services Tax (GST) risks upon sale.

GST and residential properties

The interaction of GST with residential property transactions in Australia is a complex but critical area of taxation law. Generally, GST does not apply to the sale of existing residential properties, as these are classified as “input taxed” supplies. However, GST does apply to “new residential premises,” including newly constructed homes or significantly altered properties.

While this distinction may appear straightforward, complications often arise when renovations transform existing structures into “new” properties under GST rules. Buyers, sellers, and developers must understand how GST applies to avoid unexpected liabilities or ATO compliance issues.

What are substantially renovated properties?

The ATO defines substantially renovated properties in GSTR 2003/3 as properties where most of the original structure has been removed or replaced. This effectively results in a “new” property for tax purposes.

Understanding the criteria for substantial renovation can help property owners and developers effectively navigate their tax obligations.

Key criteria for substantial renovation

1. Extent of renovation

The renovations must affect the building as a whole, not just minor or cosmetic upgrades. Examples include:

• Replacing walls, ceilings, or floors
• Altering structural elements such as beams or foundations
• Adding or removing a substantial number of rooms

Cosmetic updates like repainting, retiling, or installing new kitchen appliances do not usually qualify unless part of a broader structural renovation.

2. Nature of renovations

Renovations must fundamentally transform the property into a “new dwelling.” The ATO stipulates that:

• The work results in the property being different from its original state.
• Most of the original structure is either replaced or rebuilt, leaving minimal portions intact.

3. Renovation vs. restoration

The work must go beyond restoration or repair. While restoration focuses on returning a property to its original state, substantial renovation involves modernising and restructuring to meet contemporary standards.

4. Scope of the entire building

The renovations must impact most parts of the property. For example:

• Renovating only the kitchen and bathroom does not qualify.
• Changes must cover a majority of the building to meet the “substantial renovation” threshold.

Examples of substantial renovations

Here are some common examples to clarify the distinction:

• Qualifying renovations:
  • A house is entirely gutted, leaving only external walls, with all internal structures rebuilt.
  • A developer demolishes all internal walls, replaces the roof, floors, and plumbing, and modernises the space.
• Non-qualifying renovations:
  • Repainting all rooms and updating cabinetry without altering the property’s structure.
  • Renovating one or two rooms while leaving the rest untouched.

The purpose of renovation matters

The intent behind the renovation plays a crucial role in determining GST implications. Properties renovated with the intent to sell are more likely to attract GST, especially when undertaken by businesses or individuals registered for GST. On the other hand, personal renovations for owner use may not carry the same implications.

Need tax advice?

Navigating GST obligations for substantially renovated properties can be complex. Expert advice is crucial to avoid unexpected tax liabilities and remain compliant with ATO regulations.

For personalised guidance, contact the LDB Group. Our expert team can assist you with GST considerations, tax planning, and property-related financial advice.

Simply call us on (03) 9875 2900 or submit your enquiry through the contact form below.