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Avoiding the igloo – land sold for a GST-inclusive or GST-exclusive price?

AvoidIgloo

A local sale of goods or a supply of services by a GST-registered business will usually be:

  • for a GST-inclusive price/fee; and
  • accompanied by a tax invoice confirming the GST-inclusive price and the 10% (1/11th) GST included in the price/fee.

When to look out for GST on land sales

The price and GST on a sale of real estate in Australia can be far less clear. Although a majority of sales of residential property are not subject to GST, sales broadly of:

  1. new residential premises (where not tenanted for at least five years);
  2. vacant land that can be used for residential development; and
  3. commercial residential premises;

are generally (GST) taxable supplies at settlement where the sale is by a seller who is either registered or required to be registered (perhaps solely required to register due to the sale). There are some exceptions.

Unanticipated GST and reducing GST with the margin scheme

Sometimes the parties can be caught unaware of a GST liability on the land sale or of an opportunity to apply the margin scheme to a sale of residential land under Division 75 of the A New Tax System (Goods And Services Tax) Act 1999 so a GST rate lower than 10% can be applied. A margin scheme rate lower than the 10% rate (or 1/11th of the GST inclusive price) will suit:

  • a purchaser:
    • not entitled to claim a GST credit (purchaser credits are not available when the margin scheme is applied to the purchase) ; and
    • liable for stamp duty calculated ad valorem based on the (lower) purchase price plus GST; and
  • the vendor who receives a higher nett price.

GST-inclusive or GST-exclusive price in the contract?

Normally a price for land is GST-inclusive under a contract in NSW.

Still, a purchaser should be vigilant when purchasing real estate where GST could apply. The current 2019 Law Society NSW and Real Estate Institute NSW contract of sale of land (the NSW contract) now has a number of checkboxes and GST residential withholding details which should indicate if GST is to apply when a proposed contract is received from the vendor. However where vendor agents and conveyancers are unaware or unsure about whether GST applies these can be left unchecked or incomplete when they should be proposed checked and completed.

The general conditions in the NSW Contract state that:

Normally, if a party must pay the price or any other amount to the other party under this contract, GST is not to be added to the price or amount. (Emphasis added)

General condition 13.2

That normal case thus matches a GST-inclusive price one is used to seeing on a tax invoice for goods or services from a supplier. However beware a contract which reveals that the purchaser must pay the price “plus GST” (so the price is GST-exclusive and general condition 13.2 is thus overridden) in a special condition even where less than obviously so: see Booth v Cityrose Trading Pty Ltd [2011] VCAT 278.

The importance of the terms of the contract, and the imperative to pick up an exceptional GST-exclusive special condition, is apparent from the NSW Court of Appeal decision in Igloo Homes Pty Ltd v Sammut Constructions Pty Ltd [2005] NSWCA 280. In that case a price plus GST (GST exclusive) provision in a 2000 edition NSW contract permitted the vendor to recover an additional amount of $250,000 on account of GST even though a series of misunderstandings (or worse) indicated that:

  1. the vendor had put the properties on the market at a price inclusive of GST;
  2. the purchaser had intended the price it offered to be inclusive of GST;
  3. the selling estate agent had intended the price agreed upon to be inclusive of GST;
  4. the selling estate agent was the vendor’s agent for the purpose of negotiating the sale and the price;
  5. the selling estate agent had given written advice to the vendor of the terms agreed;
  6. the vendor’s directors had intended the price to be the price agreed plus $90,909 on account of GST applying the margin scheme;
  7. neither party had intended the price to be the price agreed plus $250,000 on account of GST;
  8. the vendor had settled the sale even though GST of any amount and other amounts due at settlement hadn’t been paid by the purchaser;
  9. at settlement the vendor had accepted the price agreed and undertook to provide a tax invoice; and
  10. the purchaser’s mistake as to the effect of the contract was induced by the vendor’s agent who knew of and intended that outcome.

Contract could not be rectified

The evidence in the case showed that the purchaser did not understand GST and the margin scheme and had not examined the contract to identify the GST-exclusive special condition. It was found that the vendor’s conveyancer’s and the agent’s conduct described above was not so wrongful that the “rectification” of the contract sought on appeal was justified: a rewriting of the contract by the courts to reset the price as GST-inclusive.

Add the GST inclusive amount in the box to avoid an “Igloo”

The 2019 NSW contract includes a box on the front page:

The price includes GST of: $ _________

however the box is marked “optional”. It is in a purchaser’s interests to ensure this box is completed before contracts are exchanged so a purchaser’s liability for a “plus GST” amount above the agreed contract price can be countered for whatever reason.

The margin scheme and the price

One reason the parties may not complete this box is that the parties do or would seek to apply the margin scheme where GST must be charged. Eligibility for the margin scheme and thus a GST rate lower than 1/11th of the sale price is limited – see Eligibility to use the margin scheme at the ATO website. A GST liability under the margin scheme needs to be calculated by the vendor and the vendor may not have performed the calculation in time for the exchange of contracts. A further requirement of using the margin scheme is that the parties must agree to apply it under their contract (another checkbox on the NSW contract).

Under the consideration method for applying the margin scheme, which will usually be the only method applicable to property acquired on or after 1 July 2000, a margin scheme GST is 1/11th of the margin viz. the margin is the difference between the property’s selling price and the original purchase price. That is, the sale price less the purchase price equals the margin.

The GST residential withholding amount when the margin scheme applies

The margin scheme GST and rate differs from the flat 7% GST residential withholding amount which a purchaser must usually withhold at settlement based on the vendor’s notification that margin scheme GST applies on the contract.  GST residential withholding was introduced in 2018 to require a purchaser to withhold an amount to meet the GST on the sale (taxable supply) of residential land at settlement. The GSTRW amount is paid by the purchaser to the Australian Taxation Office at settlement as an approximation of the margin scheme GST with credit given to the vendor for the payment.

The 7% GST residential withholding amount is presently set by sub-sections 14-250(6)-(8) of Schedule 1 to the Taxation Administration Act 1953. Under sub-section 14-250(7) the 7% rate is applied to the “contract price” to determine the amount that must be withheld. It is to be remembered that the 7% is not the GST payable by the purchaser so a calculation treating a notionally GST-exclusive price as the price in the 7% calculation  viz.

notGSTRWcalc

viz. 6.542056075% of the contract price on a supposed GST-inclusive basis withheld as GST residential withholding is not compliant either with this author’s understanding of sub-sections 14-250(6)-(8) or with the ATO website guidance on withholding on GST at Settlement. It should be 7% x Price.

GST withholding on residential property sales to plug a phoenix hole

The Federal Government, through the Phoenix Task Force involving the Australian Taxation Office (ATO) and other government agencies, has been cracking down on invidious “phoenix” activity through this decade.

The phoenix swindle

The idea behind a phoenix entity is that the entity, usually a company, is set up to undertake and undertakes a money-making activity where a considerable portion of the money made is owed to government, usually as taxes such as PAYG withholding or GST, perhaps after a significant claim of GST input tax credits, or to other agencies or creditors. Before the taxes, or money owed, can be collected, the money made by the entity is stripped from the entity by the controllers of the entity. The controllers can then rise from the ashes, phoenix like, with a new entity which can again make money for the controllers in the same way and can again be stripped of money owed to government, agencies and creditors by them.

Proposed GST withholding by purchasers of residential land

The government is addressing a phoenix trouble spot with property developers by the proposed introduction of a GST withholding from 1 July 2018 under which purchasers must retain one eleventh of the price of the property on or before settlement of sale of residential land for remission to the ATO. The Exposure Draft: Treasury Laws Amendment (2017 Measures No. 9) Bill 2017 has now been released in line with an announcement in the 2017/18 Budget. The withholding requirement in the Exposure Draft Bill would be a short circuit to the usual GST regime which obliges a vendor who is registered or required to be registered for the GST to collect GST on a taxable supply to a purchaser and for the vendor to pay it to the ATO via their BAS.

GST withheld 10% – GST owing less?

If the vendor applies the margin scheme then the purchaser will have withheld too much GST. The withholding rules in the Exposure Draft Bill include a mechanism which allow a vendor, who is not a monthly BAS lodger, to seek an early refund of the overpaid GST when too much GST has been withheld for the vendor by the purchaser.

GST withholding will apply to a taxable supply of land by a vendor who is registered or required to be registered for the GST under the Exposure Draft Bill. Both new residential premises and land that is potentially residential land, though not if it is input taxed as existing residential premises, require GST withholding by the purchaser. In other words the withholding obligation is broadly imposed so that the purchaser does not need to inquire about whether the land is new residential premises for GST purposes to the vendor. Broadly, and subject to exceptions, it is understood that the withholding obligation arises on the purchase of land from a vendor who is registered or required to be registered for the GST as follows:

Chart of kinds of supply

Purchaser might need to withhold 22.5% for the ATO!

The proposed introduction of the GST withholding regime follows two years after the introduction of the non-resident capital gains tax withholding tax which requires a purchaser to withhold 12.5% of the price unless the vendor produces a ATO clearance certificate to verify that the vendor is not a non-resident: see Australia is now tracking & surcharging foreign buyers of land. These withholding obligations will require focus in conveyancing with enterprises which sell residential or potential residential land in the course of their operations.

Both measures visit responsibility to collect tax on the purchaser because of the some time difficulty of collecting tax from a vendor who departs with the sale money leaving taxes and creditors owed. Potentially both withholding obligations can apply to a purchaser who would then be withholding 22.5% of the price to pay to the ATO. There is no clearance certificate or other relief to relieve a purchaser from GST withholding, as yet, which may mean that one-eleventh GST withholding will have a broad application to buyers of residential land from GST registered property developers and traders should the Exposure Draft Bill become law.