GST – The Lurky Tax
Why property developers can’t afford to take GST lightly in 2025
It’s been called “the lurky tax” for good reason. GST often hides quietly in the background until it suddenly pops up and catches you off guard.
For property developers, GST is rarely straightforward. Between the margin scheme, residential vs commercial classification, and the timing of sales and purchases, it can become one of the most misunderstood and costly taxes in the business.
In 2025, the Australian Taxation Office (ATO) has placed a sharper focus on property and construction, and GST compliance is at the top of the list. Let’s unpack where GST lurks for property developers, the most common mistakes, and how to stay on the right side of the ATO and your bottom line.
The basics: what makes GST so tricky in property development
Unlike other industries, property developers deal with transactions that are large, complex and span several years. That means:
You’re often claiming input tax credits (ITCs) before you’ve made any sales.
You might hold multiple projects with different GST treatments.
The classification of your sale (taxable, input-taxed, or GST-free) depends on fine details in the legislation.
GST becomes “lurky” because small changes in intention, contract wording or timing, can completely change your liability. And when the numbers are in the millions, small mistakes can turn into big penalties.
1. When GST applies (and when it doesn’t)
GST applies when you make a taxable supply. For developers, that usually means:
Selling new residential premises; or
Selling or leasing commercial property.
But not all sales attract GST. For example:
Selling an existing residential property is input-taxed - you don’t charge GST, and you can’t claim GST for related expenses.
Selling farmland or subdivided land may in certain circumstances be GST-free, depending on the buyer’s use and other conditions.
Here’s where things get murky:
You might start a project intending to hold property as a long-term investment, but then decide to sell. That change in intention can trigger GST obligations, and potential adjustments to previously claimed GST credits (discussed further below).
Takeaway: Always revisit GST treatment when your project purpose or structure changes.
2. The margin scheme – your best friend or worst enemy
The margin scheme is one of the most misunderstood areas of GST in property. It allows developers to pay GST only on the margin (the difference between the sale price and original purchase price) rather than on the full sale value.
Sounds great, right? It is when used correctly.
Common mistakes developers make:
Assuming you can apply the margin scheme without checking whether the purchase was eligible.
Forgetting to include the correct clause in the sale contract stating that the margin scheme applies.
Using an incorrect valuation date or method when calculating the margin.
Key rules to remember:
You can only apply the margin scheme if you purchased the property under a transaction where GST was not charged in full (e.g., bought from a non‐GST-registered vendor or under the margin scheme yourself).
You can’t use it if you bought a fully taxable supply (where GST was charged on the whole price).
The calculation must be based on either the “consideration method” or the “valuation method” depending on when the property was purchased.
Tip: The GST treatment of your purchase (and in some cases the purchase before that), before settlement otherwise you may lose the ability to apply the margin scheme later.
3. GST at settlement – don’t forget the withholding rules
Since 2018, the ATO has required purchasers of new residential property or land to withhold GST at settlement and remit it directly to the ATO.
This means:
You, the developer, don’t collect the full amount from the buyer.
The buyer (or their conveyancer) withholds 1/11th (or 7% if under the margin scheme) of the price and pays it to the ATO.
Why it matters:
Many developers still get caught out because they don’t realise they need to:
Issue the correct Notice to Purchaser before settlement and ensure ABN details are the correct entity!
Report the transaction properly in their BAS, and
Reconcile the withheld amount to their GST payable.
Failing to manage this properly can cause reconciliation errors, delayed refunds or ATO penalties.
Takeaway: Treat the withholding process as part of your project’s financial close-out, not just a settlement formality.
4. Input tax credits (ITCs) and Division 129 adjustments: the silent killer
One of the biggest traps for developers is claiming input tax credits on every cost associated with a project, rates, legal fees, design costs, loan interest, without considering whether the related sales are taxable or input-taxed.
If part of your project results in GST-free or input-taxed supplies (like long-term residential rentals), you can only claim a proportion of your ITCs.
But where developers often come unstuck is Division 129 of the GST Act - the “adjustment for change in creditable purpose.” This rule is triggered if the development changes from your original intention, i.e. trading stock vs long term hold.
In practice:
You might start a project intending to sell new apartments (a taxable supply), so you claim full GST credits on design, constructions, consultants and holding costs.
Then, when the market softens, you decide to hold some units and rent them out. Those rentals are input-taxed, meaning the original GST credits are no longer fully valid.
Division 129 requires you to repay part of those credits through an adjustment in your BAS.
Why it matters:
Division 129 is retrospective, it can apply for up to ten adjustment periods.
The adjustment calculation is complex and based on your actual use compared to your intended use, even partial or temporary changes can trigger it.
Many developers don’t realise they need to make an adjustment until years later, when the ATO audits and discovers that the property’s end use differed from the original plan.
Example:
You claim $220,000 in GST credits over two years while developing ten apartments, expecting to sell them all.
After completion, you rent out five and sell five.
Division 129 requires you to adjust for the 50 per cent that changed use, repaying roughly half the GST credits previously claimed (subject to timing rules and thresholds).
Tips for managing Division 129 risk:
Document your project’s intended use from the start (for each stage or building).
Review use annually and make Division 129 adjustments in your BAS when necessary.
Use apportionment schedules to track creditable purpose over time.
If you re-develop or re-purpose a site (for example, change from sale to long term hold), seek advice immediately.
5. Mixed-use developments
Mixed-use projects (for example, retail + residential) are a GST headache.
Part of the project may be taxable (shops), part input-taxed (apartments), and sometimes even partly GST-free (social housing). Developers often:
Fail to apportion correctly, or
Don’t adjust when usage changes post-construction.
The ATO has been actively reviewing mixed-use projects, especially where ITCs were claimed 100% upfront and no adjustment made later.
What to do:
Track your expected use from day one - commercial vs residential.
Apply a reasonable method of apportionment (by floor area, income or cost).
Review annually and make adjustments in your BAS as required.
6. Timing: when to account for GST
Another “lurky” area is timing, when GST should be reported.
Most developers use the accrual method, meaning GST is payable when an invoice is issued or payment received, whichever comes first. But property projects can run over several years, and progress payments, deposits and retention amounts can cause confusion.
Common errors:
Reporting GST too early or too late on deposits or milestone payments.
Forgetting to report GST when the project is complete but titles haven’t transferred yet.
Claiming ITCs before being entitled to them (e.g. before receiving a valid tax invoice).
Failing to separate holding costs vs development costs correctly for GST/ITC treatment.
Tip: Use a clear GST reporting calendar tied to your project’s timeline, and have your accountant review before each BAS period. Note delaying settlement could be a taxing masterstroke.
7. ATO’s focus: data-matching and mis-classification
The ATO has stated that property and construction remain key audit targets in 2025, particularly around GST reporting.
They’re using data from:
State land titles offices,
Property developers’ settlement reports,
BAS and income tax returns, and
Third-party contractors and banks.
That means they can spot:
Projects where GST wasn’t reported but development activity clearly occurred,
Inconsistent use of the margin scheme,
Undeclared settlements or missing GST at settlement forms,
Over-claimed ITCs for non-taxable sales.
In short: the ATO now sees almost everything, so accuracy and documentation are non-negotiable.
8. Practical steps to de-lurk GST risks
Here’s a checklist to help property developers stay ahead:
Review GST treatment project-by-project - don’t assume every development is the same.
Confirm eligibility for the margin scheme before signing contracts.
Keep detailed records for every purchase and sale, including GST status and valuation evidence.
Track changes in project use or structure - update your GST treatment accordingly.
Reconcile GST at settlement for every sale and ensure withheld amounts match your BAS.
Apportion input tax credits properly and document your method.
Review joint venture and trust arrangements to confirm who lodges and claims.
Ensure all BAS lodgements are timely and accurate.
Conduct a year-end “GST health check” with your accountant before 30 June.
Final thoughts
GST isn’t out to get you, but it will catch you if you ignore it.
It’s complex, full of exceptions, and constantly evolving with ATO interpretations and legislative tweaks.
When managed proactively, GST can be predictable and controlled, not a last-minute surprise.
So next time you’re mapping out your next project, remember:
Before you break ground, get the low down on GST (sounded way better when we wrote it).
Get in touch with m+h Private today on +61 3036 7174 to see how we can help deliver the best support to you and your business
As always, the above is general in nature, please discuss with your trusted advisor.