In brief - Where a service is provided for a fee by an agent and it is a taxable supply, then GST will apply
Where an agent incurs an expense, it must make it clear whether it is incurring an expense on its own behalf or on behalf of the principal/owner. If it does not do so, then the agent will be responsible for the GST liability arising from that supply.
When does an agent incur a GST liability?
Almost every aspect and transaction involving the operation of a real estate business has GST consequences.
If an agent incurs an expense (for example repairs, advertising, maintenance, preparation of marketing material and the like), the agent must make it clear whether the agent is acting on its own behalf or as agent for the principal.
If the real estate agent discloses that it is only acting as a common law agent for the principal, then the principal is liable for the GST on the taxable supply provided by the third party but is also entitled to the input tax credit. The agent incurs no GST liability in those circumstances.
Real estate agent compensated exactly for expenses incurred
In the document issued by the Australian Taxation Office (ATO) headed Property and Construction Industry Partnership, section 14 deals with real estate agent issues. It states that a reimbursement to a real estate agent by an owner or principal is considered by the ATO to occur where the agent is compensated exactly (not approximately) for the expenses incurred.
In those circumstances, the ATO will generally accept that the expenses are those of the owner/principal and that the agent has incurred the expenses on behalf of the owner/principal.
It is prudent for agents to ensure that their engagement, agency or appointment agreements make it clear that the agent will incur costs as a common law agent for the principal or owner and that the principal or owner has the responsibility for the expenses incurred.
Does the agent's fee include GST?
Charges for services provided by a real estate agent in the furtherance of its enterprise are subject to GST.
The agency appointment or engagement agreement must make it clear whether the charges from the agent are inclusive or exclusive of GST. The implication (if nothing is stated) is that the fee would be GST inclusive. The agent needs to be careful if this is not the case and should state that GST is charged in addition or that the fee is "grossed up".
For example, if on a sale of a commercial property the commission is 2%, the commission should be stated to be either 2% plus GST or 2.2% inclusive of GST. If nothing is stated and the agent intended the fee to be exclusive of GST but all the other party has to pay is the actual fee nominated, then the agent effectively loses one-eleventh of the fee which has to be remitted as GST to the ATO.
All services provided for a fee by real estate agents are subject to GST
Agents need to understand that any service provided for a fee is subject to GST. This includes not only the normal things such as sales commissions and letting fees, but also fees for lease preparation, administration fees, fees for negotiating a transaction (for example as a purchaser's or tenant's representative), fees for supplying valuation letters, fees for providing market appraisals, fees for providing a report as to development options for a site, inspection fees and general report fees.
However, there is no taxable supply where no fee is charged. A complimentary service (for example a market appraisal or complimentary assessment of the development potential or options for a site) will not be a taxable supply.
GST still payable on agent's services regardless of GST status of property or its owner
Agents need to appreciate that the GST status of the property or of the owner/principal is irrelevant to the services provided by an agent. As the ATO paper referred to above makes clear, it makes no difference if the recipient is a GST exempt organisation or if the transaction relating to the property is itself not a taxable supply. GST will still be payable on the services provided by the agent to the owner/principal.
Agents must take care not to misrepresent GST consequences of a transaction
Agents need to be aware of the general GST consequences of transactions that they are involved in, particularly sales, so that they are not embroiled in a dispute over who is liable for the GST or the basis of calculation of the GST or a claim that there has been misrepresentation.
Care must be taken by agents with respect to what they represent to potential purchasers, tenants or others with respect to GST consequences of a transaction.
If an agent makes a statement about GST, it must check its facts before it publishes it and the same applies to statements made by an auctioneer at any auction. An incorrect statement can leave an agent or auctioneer liable to a claim for negligent misrepresentation where this statement is proved to be incorrect.
GST payments and overseas interests
We occasionally come across claims that GST is not payable because an overseas interest is involved. This is not correct. GST is usually applicable. GST is only not applicable where the service is not "connected to Australia".
If the agent provides a service to an overseas principal where the service is provided overseas, then no GST is applicable as the transaction has no connection to Australia.
GST exemption for sale of real estate business as a going concern
Finally, if an agent sells its business, normally the going concern exemption will apply. (For more information please see our earlier article Exemption from GST for the supply of a going concern under GSTR 2002/5.)
This may not be the case where the agent runs a number of different enterprises under the one real estate banner and where the business enterprises are all run by the one company.
If only part of the business is sold (for example the rent roll or the advisory portion of the business) but the remainder is retained by the agent, it is strongly arguable that this is not the sale of a going concern, as all the elements necessary for the business to continue are not transmitted to the purchaser.
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.