Contents
- GST liability
- Taxable supplies
- Conditions to satisfy
- GST timing issues
- Cessation of registration
- Pitfalls to be aware of
GST liability
There is only a liability for GST where:
- an enterprise is being carried on,
- the annual turnover is at least $75,000 ($150,000 for non-profit bodies) and
- a taxable supply is made.
Therefore, when selling a property there will be no GST liability unless all these requirements are met.
The ATO has issued Miscellaneous Taxation Ruling MT 2006/1 on the meaning of carrying on an enterprise. In that ruling, the ATO states that in isolated transactions where land is sold that was purchased with the intention of resale at a profit, the ATO considers these activities to be an enterprise.
Assuming an enterprise is being carried on, it must then be determined whether the supply of property is:
- a taxable supply
- an input taxed supply; or
- a GST free supply.
There is the option of using the going concern concession where all the necessary conditions are met. This will result in the supply being treated as a GST free supply.
If the supply is taxable, there is an option to use the margin scheme.
Comprehensive details regarding GST and how it relates to property development can be found in the GST Act.
Taxable supplies
In the context of property sales, taxable supplies would include:
- the sale of land
- the sale of new residential premises (discussed below)
- the sale of commercial premises (including commercial residential premises such as motels).
Taxable supplies do not include the sale of residential premises generally as these are input taxed.
Residential premises are defined at s 195-1 of the GST Act as land or a building that:
- is occupied as a residence or for residential accommodation; or
- is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation (regardless of the term of the occupation or intended occupation) and includes a floating home.
The purchaser’s intention is not relevant to the determination of whether the premises are residential.
New residential premises
Section 40-75 of the GST Act provides residential premises are ”new residential premises” if they:
- have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or
- have been created through ”substantial renovations” of a building; or
- have been built, or contain a building that has been built, to replace demolished premises on the same land.
However, where the residential premises are sold after five or more years of having been rented continuously, they are not regarded as new residential premises and the sale is an input taxed supply.
Input taxed supplies
In the context of property sales, input taxed supplies include:
- the sale of residential premises such as houses and units (but not the sale of new residential premises or commercial residential premises such as hotels
- the sale of shares or units in a company or trust.
GST is not payable on input taxed supplies. However, GST on expenses associated with the supply (e.g. legal and accounting costs) cannot be claimed back as input tax credits. They would be included in the cost base of the asset where CGT is applicable.
GST free supplies
If a supply is GST free, no GST is payable on the supply, but the entity is entitled to an input tax credit on any creditable acquisitions that relate to the supply.
Apart from the GST free going concern exemption discussed below, the other main types of GST free property supplies are:
- the sale of farmland where there has been a farming business carried out on the land for at least 5 years before the sale, and the buyer intends that a farming business will be carried out on the land (s 38-480 of the GST Act);
- the sale of land where it is subdivided from land on which a farming business has been carried on for at least 5 years and the land is sold to associates for no or less than market value consideration (s 38-475 of the GST Act).
The going concern concession
Section 38-325 of the GST Act provides that the supply of a going concern is GST free where certain conditions are met. This instantly results in stamp duty savings. It also means that the purchaser does not have to obtain additional funds to cover the GST that would otherwise be included in the price of a going concern if the section did not apply. GST on the expenses associated with the sale may still be claimed back as input tax credits by the vendor.
However, the vendor needs to be very wary as if a sale is not accepted as the supply of a going concern by the ATO, then the vendor, not the purchaser, will have the liability for the GST.
Conditions to satisfy
Sub-section 38-325(1) of the GST Act supplies a going concern that is GST free where all the following conditions are met:
- the supply is for consideration;
- the recipient of the supply is registered (or required to be registered); and
- both parties have agreed in writing that the supply is a going concern.
A supply of a going concern is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement under which:
- the supplier supplies to the recipient all the things that are necessary for the continued operation of an enterprise; and
- the supplier carries on the enterprise until the day of the supply.
These are two additional conditions that must be satisfied.
Scenarios where the sale of property may amount to the supply of a going concern (assuming all the conditions above are met) include:
- where it is one of the assets of an enterprise of property development
- a fully tenanted building, where the property and all leases, agreements and covenants are included in the sale.
Important
Be wary of a ‘supply of a going concern’ which would otherwise be input taxed.
Input tax credits relating to a supply on sale of property which would have otherwise been input taxed (e.g. the sale of residential rental property) but is GST free because there is a supply of a going concern (e.g. the sale of leased residential rental property), are available to the extent that they relate to the supply under the arrangement.
However, Division 135 of the GST Act requires purchasers to make an increasing adjustment where they have acquired a GST free going concerned but then use the enterprise for input taxed or private purposes.
The High Court found for the Commissioner of Taxation on this point in the case of FCT v MBI Properties Pty Ltd [2014] HCA 49. The taxpayer and Mum and Dad investors bought residential apartments which were subject to leases to a company that used all the apartments together as part of a serviced apartment business. The apartments were sold as going concerns which meant the purchasers registered for GST.
The Commissioner issued GST assessments to the purchasers which included increasing adjustments under Division 135 as the apartments were now being used for input taxed supplies. The High Court held there were Division 135 adjustments for the purchasers.
Option to use the margin scheme
Those registered for GST and making taxable supplies can reduce their GST liability by choosing to calculate GST on the supply of real property on the margin of that supply. Under the GST margin scheme, GST is calculated on the supply as 1/11 of the margin on the sale.
The margin scheme is available on a taxable supply of real property made by:
- selling a freehold interest in land
- selling a stratum unit, or
- granting or selling a long-term lease.
Generally, the margin is the tax-inclusive sale price less the original purchase price. However, if the property was held on 1 July 2000, the margin is the GST inclusive sale price less the value of the property on 1 July 2000 (a valuation of the property at that date is necessary).
Restriction on the use of the margin scheme
The margin scheme cannot be used if the entire freehold interest, stratum unit or long-term lease was acquired through a supply that was ineligible for the margin scheme.
“Ineligible for the margin scheme” means a taxable supply on which the GST was worked out without applying the margin scheme – s 75-5(3) of the GST Act.
This requirement means that generally the margin scheme can only be used where no GST was charged when the real property was acquired. For example, when the property was:
- acquired from a supplier who used the margin scheme
- acquired from an entity that was not registered or required to be registered
- supplied in a GST free supply
- supplied in an input taxed supply; or
- acquired through inheritance and certain conditions are satisfied.
Note also that:
- a supply that is ineligible for the margin scheme continues to be ineligible for the margin scheme after it is supplied as part of a GST free sale of a going concern, as GST free farmland, or it is supplied to a registered associate for no consideration
- where the real property is acquired GST free as part of a going concern, GST free farmland, or from a registered associate for no consideration, the calculation of GST on the subsequent sale of that property under the margin scheme should also account for the value added by the previous owner.
Need for agreement in writing
The supplier and the recipient of a taxable supply of real property need to agree in writing to apply the margin scheme.
The written agreement must be made:
- on or before the making of the supply (usual settlement); or
- within such further period as the Commissioner allows.
Impact of margin on purchasers
Purchasers of real property and premises where GST on the supply was calculated on the margin cannot claim input tax credits on the acquisition.
Subdivided land or stratum title units
Where an entity purchases land, subdivides it or builds stratum title units on it, and later applies the margin scheme in selling the subdivided land or units, the consideration for the acquisition of the subdivided land or the stratum title unit is the corresponding proportion of the consideration for the land acquired.
GST timing issues
Entities accounting for GST on a cash basis
When using the cash basis, the GST does not have to be remitted until it is received from the customers (i.e. the GST is attributed to the tax period in which the payment is received – section 29-5 of the GST Act).
No input credit entitlements arise until the purchases are paid and the entity holds a tax invoice for the creditable acquisition – section 29-10 of the GST Act.
A tax invoice is not necessary if the value of the supply is less than $82.50 (GST inclusive).
Entities accounting for GST on an accruals basis
Section 29-5 of the GST Act provides that accounting for GST on an accruals basis means that the whole of the GST payable must be remitted on the earlier of:
- the issue of an invoice; or
- the receipt of any consideration in connection with the supply.
The whole of the input credit entitlements on creditable acquisitions arise on the earlier of:
- any consideration being provided by the entity; or
- the entity becoming liable to provide any consideration,
- and the entity holds a tax invoice for the creditable acquisition. A tax invoice is not necessary if the value of the supply is less than $82.50 (GST inclusive).
Changes to attribution rules
The Commissioner can change the attribution rules where he is satisfied that otherwise, their application would be inappropriate.
With contracts subject to a statutory cooling-off period he has provided the GST liability or input tax credit entitlement is attributed to the tax period in which the cooling-off period expires;
With taxable supplies under a standard land contract, he has provided the GST is attributed to the tax period in which settlement. This is regardless of whether the vendor accounts on a cash or accruals basis.
Cessation of registration
Section 25-50 of the GST Act requires that if you are registered and are not carrying on an enterprise, you must apply to the ATO on the approved form for cancellation of registration. This must be lodged within 21 days after the day on which the enterprise ceased to be carried on.
Division 138 of the GST Act provides that an entity has an increasing adjustment if its registration is cancelled and, immediately before the cancellation, its assets include anything for which it was, or is, entitled to input tax credits and the last adjustment period has not ended.
For example, a going concern has been supplied, and in so doing the taxpayer is no longer required to be registered and therefore the GST registration is cancelled. The taxpayer may have an increasing adjustment under Division 138 concerning any assets not supplied as part of the going concern but kept.
Pitfalls when selling property and completing the contract
When selling property, both parties must understand the GST implications of the transaction. Due to misunderstandings, many GST cases have involved a vendor and purchaser.
Sale at an auction
Key question: was the purchase price in the contract GST-inclusive or not?
In Ashton & Anor v Monteleone & Ors [2010] NSWSC 258 the NSW Supreme Court was asked to determine whether the vendors were entitled to rectify a contract of sale for a property by adding GST to the sale price.
Joseph Monteleone was the successful bidder at an auction of a commercial residential property. His successful bid was $1,060,000. The sale was supposed to be GST inclusive (i.e. the $1,060,000 + GST). However, the vendors’ solicitor thought that the $1,060,000 already included the GST and this is the figure he put in the contract. The purchaser argued that he thought the amount he paid included GST and that he did not have to pay an additional amount for GST.
On the evidence presented, the NSW Supreme Court was satisfied that the auctioneer had made it clear that the bid price would be plus GST. The Court ordered that the contract be rectified to accord with the vendors’ intention.
The Court was satisfied that rectification could be ordered, as it was established that both sides knew, when they entered into the contract, that their common intention was to provide for a price consisting of the successful bid amount plus GST.
This case is, however, to be contrasted with Tam v Mannall & Ors [2010] NSWSC 250 which had similar facts but this time it could not be proved that the purchaser was aware that the bid price would be plus GST.
The NSW Supreme Court held for the purchaser that the purchase price was GST-inclusive. The Court stated that for rectification to be ordered, it must be established that both sides knew, when they entered into the contract, that their common intention was to provide for a price consisting of the successful bid amount plus GST. Having regard to the evidence, the Court held the vendors failed to prove this common intention existed.
Requirement for the purchaser to withhold GST
Purchasers of new residential premises and new subdivisions of potential residential land are required to make a payment of part of the purchase price to the ATO. Below is a summary of the main issues – see GST Withholding article for more detail.
The rules require that where an entity makes a taxable supply by way of sale or long-term lease of:
- potential residential land that is included in a property subdivision plan; and does not contain any building that is in use for a commercial purpose; or
- new residential premises (premises not previously sold as residential premises).
The purchaser is required to withhold and pay to the ATO 1/11th of the price for the supply, before or at the time consideration is first provided (other than as a deposit). In the majority of cases, this will be upon the settlement of the property.
Potential residential land means land that is permissible to use for residential purposes, but that does not contain any buildings that are residential premises. This includes land that has been zoned for use for residential premises under a law of a State or Territory but that does not contain any current residential premises.
A property subdivision plan means a plan for the division of real property that is registered (however described) under Australian law (e.g. strata title plans and plans to subdivide land).
Exclusions from withholding by the purchaser
There is no withholding obligation where the supply is of:
- premises created through a substantial renovation
- commercial residential premises
There is also no withholding obligation where:
- the recipient of the taxable supply is registered for GST, and acquires potential residential land for a creditable purpose; or
- a supply is between members of a GST group or is made by the operator of a GST joint venture to a participant in the joint venture.
Amount and timing of withholding
If the margin scheme does not apply, the purchaser must withhold 1/11th of the contract price or price.
If the margin scheme applies to the taxable supply, the purchaser must withhold 7 per cent of the contract price or price.
Special rules apply to supplies made between associates for less than the GST inclusive market value. In this case, the purchaser must pay the Commissioner an amount equal to 10 per cent of the GST exclusive market value of the supply.
Where withholding applies, the purchaser’s withholding obligation is triggered on payment of the first part of the purchase price, excluding the deposit. Where the purchase price is payable in instalments, this means the GST on the total purchase price must be withheld from the first instalment.Withholder purchasers are not required to be registered with the ATO.
The vendor is required to notify the purchaser
Vendors supplying any residential premises (whether new or not) or potential residential land by way of sale or long-term lease must provide the purchaser with a notification before making the supply advising whether the purchaser must withhold.
This means that Mum and Dad selling the family home are subject to the notification requirement once the legislation commences.
If withholding is required, the notice must also include:
- details about the vendor (name and ABN)
- the amount to be withheld
- the date the amount must be paid to the ATO or a statement that payment is to be made at settlement.
The vendor does not have to provide a notice concerning:
- potential residential land where the purchaser that receives the notice is registered for GST and acquires the land for a creditable purpose; or
- the supply of commercial residential premises.
Credited for remitted GST
The entity that makes the taxable supply of new residential premises (or a new subdivision) is required to remit the GST to the ATO after lodging its BAS. However, it will be entitled to a credit for the payment made by the purchaser.
The availability of credit is contingent on the purchaser paying the amount to the Commissioner of Taxation. A credit will not arise merely because an amount has been withheld from a payment to the vendor.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.