Property transactions have often caused taxpayers and related professionals, such as lawyers and conveyancers, problems in addressing the impact, if any, of GST.
The Australian Taxation Office (ATO) has issued a ‘Property Contracts and Tax Invoices GST Checklist’ to assist with the correct treatment of GST when preparing contracts, as well as helping with the correct issuing of tax invoices in relation to the sale of the property.
There are two issues which should be taken into consideration. The first issue is what is regarded as property for GST purposes, which are:
- an interest in land
- rights over land and
- a licence to occupy land.
The second issue is the vendor’s GST status. GST can only apply to the sale of a property if the vendor is registered, or required to be registered, for GST. Generally, taxpayers carrying on an enterprise with an annual turnover at or above $75,000, which is the current GST registration threshold, must be registered for GST.
The difficulty for taxpayers in this issue is when the proceeds from the sale of the property are to be included in the turnover test. As a general rule, if the sale of the property is part of the taxpayer’s enterprise then the proceeds may be included, the common example would be a property transaction made with the intention of profit. If the transaction is not part of an enterprise, such as the disposal of a capital asset, then the proceeds are unlikely to be included in the test.
A one-off property transaction made with the aim of turning a profit, may be an enterprise for GST purposes and therefore, GST registration would be required. This could be the case even if the taxpayer is not normally conducting a business.
It is important to note that where taxpayers are not registered for GST, but were required to be registered, then they are liable to calculate and pay GST on any taxable supplies made, such as a property sale, even if GST was not specifically included in the sale price.
Once it has been determined that the taxpayer is registered, or required to be registered, for GST purposes, then the GST status of the transaction needs to be determined. Further, as there are a number of property-related GST rules, it needs to be determined if any of these rules are to be applied. Generally, the sale of the property will be a:
- taxable supply;
- GST-free supply;
- input-taxed supply; or
- mixed supply.
The GST status may be impacted by any of the property-related GST rules that may be applicable. These include:
- residential premises;
- commercial residential premises;
- commercial premises;
- retirement villages;
- going concerns;
- the Margin Scheme; and
- non-resident property owners.
The application of these rules can be complex so professional advice should be sought. Examples of some of these complexities are:
- A sale of residential premises is generally input-taxed; however, if those premises are new, or deemed to be new, then the supply may be taxable.
- The sale of commercial premises would generally be taxable; however, if that sale is part of the sale of a going concern then the supply may be GST-free.
- The sale of a developed property by a property developer would generally be taxable; however, the Margin Scheme may apply to reduce the amount of GST payable on the sale.
It is vital that contracts are prepared to reflect the GST treatment of the transaction, include items required to satisfy the specific treatments and provide protection to both parties should GST issues arise at a later date.
For example, the contract may reflect or include:
- The price being GST inclusive or exclusive.
- The vendor being required to pay GST in addition to the price.
- What happens if it is later determined that the GST treatment of the transaction under the contract was incorrect.
- Inclusion of appropriate clauses to apply The Margin Scheme.
- Inclusion of appropriate clauses to apply the going concern provisions.
The clauses in the contract need to be considered on a case-by-case basis and will likely include many other non-GST related items. Legal or professional advice should be sought when entering into such transactions.
The contract or settlement statement will probably include various settlement adjustments. The GST status of each of these adjustments should also be considered and treated according to the status of the particular supply.
A tax invoice should only be issued if all of the following factors apply:
- the sale, or part of the sale, is taxable;
- the vendor is registered for GST; and
- the Margin Scheme has not been applied.
The settlement statement or the contract is not likely to meet the requirements of a tax invoice, so this will probably need to be prepared and provided separately.
The tax invoice will need to detail each supply and its GST status, including the property sale itself and any settlement adjustments, as well as meeting the general tax invoice requirements.
For the purchaser to be entitled to claim GST credits on the purchase of the property and the settlement adjustments, a tax invoice must be held by the purchaser when their Business Activity Statement is lodged.
Property transactions are subject to many GST issues; however, such transactions often have significant income tax impacts for taxpayers. Taxpayers should seek appropriate professional advice before entering into property transactions.