An Overview of GST – Sale of Property
When selling real property, Goods and Services Tax (GST) can often be overlooked or forgotten. This can lead to significant consequences for many Buyers and Sellers, including incurring liabilities which they have not accounted for.
While the consideration of GST is dependant on the particular circumstances of each transaction, below are the most common GST treatments come across in relation to the sale of Property.
- “Input taxed” second-hand residential properties
Generally, when second-hand residential property is sold, the sale will be in-put taxed. This will mean that a Seller cannot charge GST, and a Buyer cannot claim GST credits in relation to the supply.
The current standard REIQ residential sale contracts provide that unless otherwise specified, the Purchase Price includes any GST payable on the supply of the Property to the Buyer. It is therefore important to note that if a Seller requires a different GST treatment, this will need to be arranged by way of a special condition.
- GST-free Going Concern
A Going Concern is essentially a running business, which can be sold GST-free if the required criteria can be satisfied. This includes:
a. The Seller must supply to the Buyer all things that are necessary for the continued operation of an enterprise
b. The Seller must carry on the enterprise until the day of the supply;
c. The supply must be for consideration;
d. The Buyer must be registered or required to be registered for GST; and
e. The Seller and Buyer must have agreed in writing that the supply is of a Going Concern.
In relation to real property, a leased commercial property is seen as the business of leasing and will often qualify as a sale of a GST-free Going Concern if the criteria are met. However, the following points are also relevant when dealing with leased commercial property:
a. Where a property has not previously been leased to a tenant, but is being actively marketed, an enterprise will not be considered as operating until the activity of leasing actually commences (i.e. when at least one tenant entered into a lease or occupies the property); and
b. The activity of leasing a property which has been previously leased to a tenant will remain an enterprise during a period of temporary vacancy, provided the property is either being actively marketed or the untenanted part of the property is undergoing repairs, refurbishments or other activities requiring vacancy; and
c. The supply of a portion of a property can be the supply of a GST-free Going Concern. For example, if you purchase a property that is partly leased commercial property and meets the relevant criteria, but also is partly residential property, an adjustment to the GST must be made in proportion to any non-creditable use.
- GST-free Farmland
Where a Buyer is acquiring farmland, the sale might be considered GST-free under section 38-48 of the A New Tax System (Goods and Services Tax) Act. Transactions of this type can be complex and require significant due diligence to ensure that the following essential criteria are met:
a. The land is farmland that was used for a farming business for at least five years immediately before the sale; and
b. The Buyer intends the land to be used for a farming business.
In addition to the above, for a sale to be GST-free the private use of any residence on the land must not cause the land to lose the essential characteristics of farmland, and GST may even need to be adjusted for the proportion of any non-creditable use.
- Margin Scheme
The Margin Scheme treatment of GST essentially means that the GST amount is based on the profit margin between acquiring the property and selling the property (or subdivided parts of the property). The GST amount will generally be calculated as being 7% of the purchase price. This makes the Margin Scheme popular among property developers, as the component of the purchase price being attributable to GST is reduced.
Where the Margin Scheme is applied, a Buyer will not receive a tax invoice at settlement and will not be able to claim back the GST. This will not usually be a concern for Buyers of residential property, as generally they would not be able to claim back the GST anyway.
If you are acquiring land to develop or subdivide, it is important to consider the GST treatment. This is because where a property is acquired through a taxable supply on which GST was worked out without applying the Margin Scheme, the Margin Scheme cannot then be applied in relation to the on-sale of the property or subdivided parts of the property.
- Price plus GST/Price includes GST
In standard REIQ contracts for the sale of commercial property, Purchase Price may be indicated to either include GST or be exclusive of GST. Where the Purchase Price is noted as including GST, the Seller will generally bear the risk of GST being payable. Alternatively, if the Purchase Price is noted as being exclusive of GST, the Buyer will generally bear the risk of GST being payable in relation to the supply.
The implications of the two options noted above can quite often be far more complex than most Buyers would anticipate. The case of Duoedge Pty Ltd v Long [2013] VSC 36 confirmed that the provision of a tax invoice does not determine whether a taxable supply has occurred, and in the absence of agreement to the contrary, the selection of “Purchase Price does include GST” in the standard REIQ commercial sale contracts will not itself mean that the Price does include GST. Subsequently, a Buyer will not be automatically entitled to claim back an amount for GST, or even a refund of moneys paid to the Seller if the sale turns out not to have been a taxable supply.
- Seller not registered (or required to be registered) for GST
In some circumstances, a Seller is not registered for GST and is not required to be registered for GST. In this case, GST does not need to be taken into account for the sale of property. It is recommended that the parties ensure that this is dealt with by way of a special condition, however every contract should be considered in the circumstances.
Where the Seller is not registered for GST, the Buyer will not be able to claim GST credits in relation to the purchase.
The calculation and treatment of GST in relation to the sale of property can be complicated and require careful consideration. If you are considering selling or buying property, we recommend that you seek legal advice and financial advice to ensure that you are fully aware of your rights and obligations.