GST AND PROPERTY
GST Generally
GST will apply to most contracts over real property (such as the sale of land, leases, licences, encumbrances, etc). GST is payable by the person who makes the "supply" under the contract. For example, this would be the vendor of land, or the landlord under a lease.
The supplier pays GST to the Tax Office out of their price/fee, and in turn receives an "input tax credit" for the GST component of its related costs. In other words, you pay GST on your sales and are reimbursed the GST on your purchases. The supplier is expected to set its prices to allow for its GST liability.
There are four different ways GST can apply to a transaction:
Sale of Land
The way GST effects a sale of land depends on the nature of that land. Generally speaking, a sale of commercial land will be ordinarily taxable. That is, if the vendor is registered and sells land in the course of its enterprise, it will have to pay 1/11th of the purchase price to the Tax Office in GST, and the purchaser (if registered and acquiring the land in the course of its enterprise) will be entitled to an input tax credit in the same amount. However, certain types of land will attract special treatment:
Leasing
Leases will be caught by GST if the landlord is registered. A landlord must be registered if their annual turnover is $50,000 or more.
In the case of commercial leases, GST will apply in the usual manner. GST will be payable out of rent, outgoings, turnover rents and many lease incentives. As with the sale of land, certain other types of leases attract special treatment.
A long term lease (a lease for 50 years or more) is treated more like a sale of land for the purposes of the transition arrangements and the margin scheme.
Leases signed before 8 July 1999 may receive a period of grace. If you have a contract signed before 8 July 1999 which will span 1 July 2000, you should seek advice as to its status under transition arrangements.
Residential leases are treated in the same way as sales of residential premises. That is, a landlord of residential premises is not required to pay GST from their rent, but is not entitled to any input tax credits for their costs.
This "input taxed" status does not apply to the leasing of commercial accommodation (such as hotels, motels, hostels, caravan parks, etc). A lease of commercial accommodation will be subject to ordinary GST, unless the stay is for 28 days or more in which case the landlord may be entitled to charge GST at the rate of 50% of the usual amount after the first 27 days.
Other Property Issues
In addition to sales and leases, GST will apply to any other grant or surrender of an interest in real property, such as an encumbrance, an easement, a licence or an option.
An option fee will be taxable when it is received, as will any amount which had to be paid in order to exercise the option. Even if an option was granted before 1 July 2000, the option fee will be taxable if the option can be expected to be exercised after 1 July 2000.
A bid at auction will be inclusive of GST. Vendors selling at auction should set their reserve price accordingly. On the other hand, a tender can be run on the basis of GST inclusive prices or GST exclusive prices, depending on the circumstances of the tender.
Stamp duty will be payable on the GST inclusive price. This has attracted some criticism as being a "tax on a tax".
Agent's fees will also be subject to GST. Agency contracts should be examined carefully. If the agent is receiving a commission on the sale price, remember that the sale price includes GST. For example, is it appropriate to pay more commission merely because the vendor chooses not to use the margin scheme?
Taking a deposit may incur a GST liability for the entire contract price, unless the deposit is taken as security for performance of the contract.
Conclusion
GST on property deals is arguably more complicated than on any other area. If GST is not carefully considered in each different transaction, someone will lose out - and you can bet it won't be the Tax Office, so make sure it isn't you!
For further information about issues covered in this article, please contact Kim Evans on direct line +61 8 8210 1287 or Mobile 0412 704 415 or e-mail kevans@normans.com.au.
The contents of this newsletter are for information only and should not be taken as advice on the law. This newsletter may be reproduced in whole or in part with the prior permission of Norman Waterhouse an acknowledgment of its source and copyright.
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