This article was published in this month’s edition of the Law Society Journal of NSW.

In the course of your busy conveyancing practice you come across many different situations. You are only too well aware of the importance of taking GST into account. But some situations are more common than others. For example,

Example 1

You recently acted for Peter on the sale of a commercial property inherited from his father. But when Peter gave you instructions he had a problem. The handshake deal at $2 million did not include GST. And the potential buyer was absolutely refusing to add GST. So, you suggested to Peter that he apply the margin scheme. You explained that this would mean GST only on the difference between the price his father paid for the property and the sale price now. Peter is happy about this because, his father having bought the property for $1 million in 2005 his GST bill would be halved.

Example 2

Then you had Bruce who asked you to act for him on the sale of his butcher’s shop. Bruce retired as a butcher some years ago, leasing the shop to his business partner.

Bruce has agreed to sell the premises to his business partner for $500,000. Although Bruce has been paying GST in the rent, when he and his business partner shook hands on the deal, nothing was said about GSTon the sale price.

Bruce doesn’t want to go back to renegotiate so was pleased when you explained that leasing is an enterprise for GST purposes and that the sale could be treated as the sale of a going concern and therefore GST free. Bruce is very happy about this.

Example 3

Your third recent experience was acting for Roger on the sale of a residential property. He told you that:

  • he had demolished his principal place of residence and subdivided the allotment into two;
  • he then built two residences, one of which was home and the other he is now selling for $1.1 million;
  • he hadn’t rented out the second residence before selling;
  • he is not registered for GST; and • he had never done such a transaction before – it was a one off transaction.

On these facts you didn’t think GST was an issue. On the sale contract you therefore inserted that the sale was not taxable supply.

The stings

First sting: Peter was not entitled to use the margin scheme.

What Peter didn’t tell you, because you didn’t ask, was that when his father bought the property the vendor paid 10% GST on the full sale price – in other words, no margin scheme. Under section 75-5 of the GST Act you can’t use the margin scheme on the sale of a property if normal GST was applied when you bought it. And you likewise can’t use the margin scheme on selling an inherited property if normal 10% GST was paid on the sale price when it was bought by the person who left it to you.

So Peter is liable for GST on the full $2 million with no right to recover the extra amount from the purchaser.

Second sting: Bruce’s sale is not GST free. In paragraph 108 of GSTR 2002/5 the ATO opines that ‘The owner of an enterprise which consists solely of the leasing of property cannot make a ‘supply of a going concern’ when supplying the real property subject to the lease to the lessee.’

This is because one of the things that must be supplied is the benefit of the lease covenants – which disappear when the lease merges with the fee simple. The owner is therefore not able to supply to the lessee all the things –the property plus the covenants – necessary for the continued operation of the existing enterprise of leasing the property Third sting: Rogers’ sale is probably subject to GST. In a private binding ruling – No. 1011228795667- the ATO held that a sale on the same facts required the vendor to register and pay GST, for the following reasons.

For GST purposes ‘an enterprise’ includes ‘an activity, or series of activities, done … “in the form of an adventure or concern in the nature of trade’ (GST Act,s 9-20). The acts of demolishing an existing place of residence then subdividing, building (and selling) a new residence ‘go beyond the mere realisation of a capital asset’ and therefore constitute an enterprise. The sale of new residential premises is neither GST free nor input taxed. Because the sale price exceeds the threshold of $75,000 the vendor was required to register for GST. With no top up clause the sale price of $1.1 million is therefore the GST inclusive price so that the value for GST purposes is 10/11ths of the price being $1 million (GST Act, s 9-75) and the GST payable is 10% of the value (s 9-70) amounting to $100,000.

Take away points

  • Consider GST before sealing the deal.
  • Familiarity with the legislation and rulings is essential.
  • GST can be surprising.

By Jim Main

This article is general information only and should not be relied on without obtaining further specific information.