Property Settlements - beware of the GST

The ATO has recently disallowed claims for input tax credits related to the purchase of commercial “real property” because the buyer or their representative did not check that the vendor was registered for GST at the time of settlement.  Real property includes land and buildings, an interest in land, rights over land and a licence to occupy land.

One-off transactions may still be considered as being part of an ‘enterprise’ for GST and tax purposes. Any property transactions made with the intention of being profitable may be part of an enterprise. This may apply even if the vendor is not normally in business. If the transaction is the realisation of a capital asset then it may not be seen as part of carrying on an enterprise.

Factors to consider in property transactions:

• Is the vendor registered or required to be registered for GST?
• Are special rules being applied to the sale? For example, special rules may apply to residential premises, commercial premises, retirement villages, farmland, going concerns, margin scheme and non-resident property owners.
• Does the contract specify appropriate GST treatment? The contract should include a clause that recognises whether the price is inclusive or exclusive of GST and another clause that addresses any reference to the margin scheme.
• Are there any settlement adjustments? This should be addressed in the contract if settlement adjustments such as outgoings, rates, water and so on are to be considered on settlement.
• Is a tax invoice required? If the sale is taxable, the vendor is registered for GST and the margin scheme has not been applied, then a tax invoice is required.

The margin scheme is available to the vendor. This is where GST is calculated on the margin of the sale (the difference between the purchase price or appropriate valuation) and the sale price. GST is not calculated on the entire sale value of the property. It is only available in certain circumstances and this is something that must be calculated by a tax agent. 

Remember to discuss this type of transaction with your Accountant/Tax Agent, prior to entering into the contract