What about GST?
GST is a tax imposed on the supply of goods and services. In property transactions the supplier is the vendor and they may be liable to pay GST on the transaction to the Government. A purchaser does not have a primary liability to pay GST as they are not making a supply, however the contract may provide that they must reimburse the vendor for the amount of the tax.
In determining whether GST applies to the sale of property it needs to be determined:
- whether the vendor is registered for GST or required to be registered for GST;
- whether an enterprise is being carried on by the vendor. An enterprise is carried on when activities are conducted on a regular and recurring basis with a view to making a profit; and
- whether the sale of the property is made in the course of that enterprise.
Where a residential home or vacant land is being sold by a vendor who is not carrying on an enterprise, the supply will generally be outside the GST net. However, GST will apply to supplies of vacant land, new residential premises and commercial premises where an enterprise is being carried on by the Vendor, if the Vendor is registered or required to be registered for GST.
When you are selling a property you need to know exactly where you stand with respect to GST, as otherwise you may find that you are required to remit a significant proportion of your sale monies to the Australian Tax Office. When you are buying you need to read the contract carefully to ensure whether the price in the contract is inclusive of GST, exclusive of GST or GST free.
If the price is GST inclusive, then the vendor cannot ask the purchaser for any money on top on the price nominated in the contract for GST. If the price is GST exclusive, then it may be that the purchaser can be required to pay an amount on top of the nominated price to the vendor to reimburse them for the GST which they are required to pay in relation to the sale.
Margin Scheme
The margin scheme is a method that allows for the reduction of GST calculated on the sale of a property. Normally GST is one-eleventh of the GST inclusive price of the supply. Under the margin scheme, the GST payable is one-eleventh of the of the sale price less the original purchase price, or the value of the land as at 30 June 2000, if the land has not been sold since that date.
For the margin scheme to apply to a transaction the parties must agree in writing to apply the margin at or before making the supply and other pre-conditions must also be met. Not all properties are able to be sold on the margin scheme. The application of the margin scheme is an important issue for both the supplier and the recipient. The Purchaser is not entitled to claim any input tax credits where they have purchased the property and the margin scheme has been used to calculate the GST applicable.
As the application of GST is a complex area the parties should obtain legal advice on the implications of the transaction before signing the contract.
