Tax Tip 410: How a Purchaser Could be Liable for the Sellers GST on New Property Purchase

The Taxation Administration Act of 1953 (TAA) imposes a liability on the purchaser of residential property, in certain situations, to withhold GST and remit it to the ATO where the sale of the property is a ‘taxable supply’.



I recently was about to enter a contract to purchase a brand new residential premises where the seller had indicated that the property sale was ‘not a taxable supply’. This is unusual as it would be a taxable supply in most situations – building and selling a property is usually an enterprise and the sale price is usually over $75,000 so they would be registered for GST or required to be registered if this was the case. The only reasons why it may not be an enterprise is if the sale was due to an unexpected set of circumstances such as being financially unable to keep the property.

The TAA goes on to say that the payment must be paid to the ATO at settlement. Failure to make a payment is a strict liability offence.

There is also an administrative penalty under section 16-30(1) of TAA which will be the amount that was supposed to be withheld.

To avoid this requirement to withhold the purchaser needs to give notice stating that withholding is not required, s16-30(2) of Schedule 1 of TAA. This notice must be given under section 14-255 of Schedule 1A TAA. But there is a trap for young players.

Section 16-30 of Schedule 1 of TAA says there will be no penalty where a notice is given that says the purchaser is not required to pay the commissioner under section 14-250. But there is an ‘and’ in ss16-30(2)(c) which says the entity is not required to pay the Commissioner and there is nothing in the contract or (paraphrasing) (ii) any other circumstances relating to the supply that made it unreasonable for the purchaser to believe that statement was incorrect!



See subdivision 14-250 of Schedule A of TAA.

TAXATION ADMINISTRATION ACT 1953 - SCHEDULE 1 Collection and recovery of income tax and other liabilities

and

LCG 2018/4: Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property

https://www.ato.gov.au/law/view/document?docid=COG/LCR20184/NAT/ATO/00001



Example

Homer goes and finds a nice brand new property to buy. The contract says it is not a taxable supply. Homer enters the contract and thinks nothing more of it. Settlement comes and it settles. The purchase price was $1mil. A notice was provided about GST withholding which said nothing to withhold.

Later the ATO audit and find that the seller was a developer and the sale was a taxable supply and Homer should have held 1/11th or perhaps 7% (if the margin scheme applied) of the purchase price and paid this to the ATO.

The ATO impose a penalty on Homer of 1/11th of $1mil being $90,909.

The notice may have no effect in saving Homer as the circumstances relating to the supply may have made it unreasonable for homer to believe it was correct. Homer knew it was a brand new property, Homer knew it was an enterprise and he should have known that the builder would have been required to register for GST.

Perhaps nothing will come of it, but there is a chance that Homer could be paying a lot more for the property than he thought he would be.

 

For readers of this thread that is not quite the case, as it could be read. .A developer cant evade GST due to financial circumstance. I am sure Terry didnt mean this. What he likely means is if a investor was holding a new build (constructed in the past 5ish years) intended for rental producing use and was forced to dispose due to pressing financial circumstances then GST may not apply since the owner didnt intend to conduct a enterprise. However a entity that seeks to develop and construct 12 properties and was intending to rent them may still be liable for GST as their enterprise is to develop AND hold for rental income. Their failure to hold for rental use doesnt absolve them of the GST on sale.

A solictor should be diligent in determining why "new residential premises" or land may not be liable for GST. The solicitor for the VENDOR could be liable for tax offences and they will usually pursue the matter further. Why ? Because solicitors can advise on taxing laws. Many solicitors in this case would seek the client to obtained specific tax advice and for this to be confirmed. I have seen several cases where the contracts were defective and GST needed to then be considered when I have been asked to provide such advice. A defective contract that omits use of the margin scheme could also be a case of negligent legal advice.

Its possible for GST to be payable on existing property that is perhaps up to 6 or more years old. Its not that uncommon for soliictors to encounter this. The buyers solicitor will usually engage with the vendors to query the matter and at the very least will request a withholding declaration and also conditional clauses in the contract however this is usually not sufficient on its own as noted above.

In Homers case above Homer may even find that changing the contract to use the margin scheme and claiming GST on the build is a better net position and more certain.

 

Yes I didn't mean to imply that a developer could avoid GST by a change in circumstances.

In this purchase the seller was using a conveyancer and I asked the agent why GST didn't apply to the sale. The agent said the seller was claiming the house as his main residence - which didn't make sense and I didn't respond to but left it hanging.

 

I know you didnt mean that. But I have heard it from others. Oh we were going to develop but then we decided to rent (short term) but now we need to get our loans down. Bank said sell half...In reality we will probably sell all of them eventually.

I get a fair number of enquiries from soliictors acting for vendors when the buyer solicitor queries. I have sent TD 92/135 to some solicitors when there is a disagreement over GST applying and they have stopped in their tracks. Next thing there is a new contract and we start advising them on the margin scheme etc.