Real estate agents should understand the fundamentals of GST
Agents need to understand basic principles of GST as it relates to real estate transactions. They also need to establish an appropriate network of advisers to whom they can refer issues or concerns that arise during the transaction. (This is the continuation of last month's article, How does GST affect the running of a real estate agency business?)
Basic principles for GST to apply to a transaction
Firstly you need to remember the fundamentals of GST. These are:
• There must be a taxable supply.
• The supplier must be registered or required to be registered for GST purposes.
• The supplier must have an annual turnover above the GST threshold (presently $75,000, except for charities which is $150,000).
• The supply must be "connected with Australia".
• There must be consideration, i.e. payment of money or some other benefit.
• The supply must be "in the course of or furtherance of an enterprise" carried out by a supplier (ie this excludes one-off transactions).
• None of the exemptions to GST apply.
All of these basic criteria must be met for GST to be applicable.
GST and transactions involving residential premises
With residential premises you need to consider the following:
• Are they new residential premises? If so, then GST is payable. GST is not payable if the premises are not new. Where the premises are refurbished, it depends upon the extent of the refurbishment. GST is only payable in the case of significant refurbishment, not minor refurbishment. If the premises are newly constructed but have been held for five years, they are no longer new residential premises and GST will not be payable.
• You need to look at the physical characteristics of the premises to see whether they are suitable for and capable of being used as residential accommodation, having regard to GST Ruling 2012/5 issued in December 2012. (For more information please see our earlier article Tax office ruling clarifies GST treatment of residential premises.)
• Residential premises are normally GST input taxed. Consider however the sale of an exhibition home or where the vendor may have as an enterprise acquiring, refurbishing and selling residential premises.
• Be aware of premises that have more than one use which may be partly liable for GST and partly exempt. An example is the usual premises in a suburban retail strip, which has a shop downstairs (GST is payable) and residence upstairs (GST is not payable).
Vendors using margin scheme to lower GST liability
Be careful of the margin scheme. This does not relate just to properties that were owned before July 2000.
The margin scheme can benefit a vendor who will have a lower GST liability at the end of a project if the margin scheme is utilised, but the vendor cannot claim an input tax credit for the GST included in the purchase price when the site is acquired.
You cannot use the margin scheme where GST at the full 10% rate is paid on the original supply, but you can use the margin scheme where the margin scheme was utilised at the time the site was acquired or where no GST was applicable.
Transactions involving premises which are partly residential and partly commercial
If a supply is partly taxable and partly non-taxable, for example where the premises are partly commercial (GST payable) and partly residential (no GST), you need to legitimately apportion the consideration between the two parts.
Farmland exemption from GST - purchaser's intention is relevant
Be aware of the farmland exemption, particularly of its peculiarities and limitations.
The vendor or predecessors must have used the premises for farming purposes for five continuous years (although this can be five years preceding the date of the supply).
Further, this is the only GST instance where the intention of the purchaser is relevant, as it is required that the purchaser intends to use the premises for farming purposes after acquisition.
Thirdly you need to consider the activity and whether it really is "farming purposes". For example, agistment of livestock (even if it is a commercial viable business) is not a farmland activity.
Going concern exemption from GST
Understand and be careful of the principles applying to a going concern exemption. Basically the vendor has to carry out the enterprise until the time of supply and provide all of the items necessary for the continued operation of the business. Both parties must be registered for GST purposes at the date of supply. (For more information please see our earlier article Exemption from GST for the supply of a going concern under GSTR 2002/5.)
Sale of premises the subject of a lease is a common example. If there are premises that are subject to multiple tenancies but some of the space may not be let at exchange, this can still be a taxable supply provided the vendor continues actively marketing the vacant space for lease.
You also need to be aware of complexities where a business and property are both being sold. If the business is being sold by one entity and a related entity is selling the real estate but there is one purchaser, then the Australian Taxation Office accepts that this is a going concern.
What happens if the developer has gone broke?
If a site that has a development consent and some development work completed is sold with works continuing until the date of supply, then this is a going concern. However, if the developer has gone broke, the site has been mothballed and is sold several months after works cease on site by a receiver, manager or mortgagee in possession, it is questionable whether this can be a going concern, as the continuation of the business activity until the date of supply has not occurred.
GST applies to the adjustments, incentives, levies and other payments
Be aware that, on a property transaction where GST is applicable, GST applies not just to the price but also the adjustments (for example rent, outgoings, rates and taxes adjustments).
In a property transaction, GST applies to any consideration that is paid or provided for a supply. It therefore applies not only to the usual things such as rent or a purchase price, but also incentives granted by a landlord to a tenant, payment by a tenant of marketing or opening levies or any other special payments with regards to a lease, lease surrender payments (whether paid by the landlord or the tenant), payment of project management fees and the like.
Some knowledge of GST is essential for real estate agents
Agents are not expected to be GST experts, but they need to understand the fundamentals, as this is essential in negotiating the terms of transactions and ensuring the completion of transactions which otherwise may not have been able to proceed due to adverse GST consequences.
However, where there is any doubt or concerns about the GST nature of a transaction, the agent should require the parties to get their own independent GST advice and make it clear that the parties should rely on that advice and not any input from the real estate agent, who is merely there to facilitate the transaction.
This article is based on a seminar presented in Sydney in May 2013.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2023.