GST and property

When GST was introduced back in 2000, it was meant to be a simple, self-assessing tax. However, GST and property has always been a complex area, particularly in relation to utilisation of the margin scheme.  With the release of a number of high profile GST cases, and the recent introduction of new anti-avoidance legislation, determining the GST treatment of property transactions has become even more problematic. This article highlights some of the key decisions and changes to the GST law in the last few months that businesses operating in the property sector should now be considering.

Cases:

Brady King
This case concerned whether the taxpayer acquired an interest in property/land when the contract completed or when contracts were exchanged prior to the implementation of GST on 1 July 2000 (the view of the ATO at the time).  The full federal court confirmed that a taxpayer acquired the interest upon the implementation of GST on 1 July 2000 for valuation purposes in respect of the margin scheme.  In this case, Brady King was entitled to use the valuation of the land on 1 July 2000 as opposed to the date of exchange.  The consequence was that the valuation was significantly higher on 1 July 2000 as planning permission had been granted after exchange, and therefore, the margin on sale, and the GST due on sale of the units would be significantly reduced.  However, the ATO has now successfully contended that the valuation used by Brady King as at 1 July 200 was not an approved and accurate valuation.  Consequently, Brady King must have the land revalued on its acquisition date and the GST due on sale of the units is now likely to increase.

South Steyne
The Federal Court dismissed the taxpayer's appeal concerning the characterisation of 4 categories of supply. The decision examined the terms "residential premises", "commercial residential premises", "residential accommodation" in a GST context, and looked at whether the supplies were input taxed, GST-free or taxable supplies.  Despite the property being described as a hotel it was held that the supplies of the leases were not ‘commercial residential’ and taxable, but ‘residential’ and input taxed, meaning that there was a significant loss of input tax credits.  The taxpayer was also unsuccessful in its assertion that the sales of the units should be input taxed on the basis that they had previously been sold (it was found that they were previously sold as commercial residential and therefore the supply was the sale of new residential premises and was taxable).  The taxpayer has appealed these decisions to the full federal court.  The saga continues

Hornsby Shire Council
This was a strange Tribunal case involving a compulsory acquisition of land by a government entity from a land owner which exercised a statutory right to compel the taxpayer to acquire its land.  The Tribunal confirmed that the land owner was correct in charging GST on its ‘supply’ and that the government entity was entitled to the input tax credit which it claimed.  The basis of the ‘supply’ was that the supplier did ‘something positive’ (required for making a supply) by entering into an obligation, or by requesting the government entity to acquire the land.  In summary, where something is sold under a compulsory purchase order, this should be treated as a normal supply for GST purposes.

New Anti Avoidance Legislation
The new laws require taxpayers to apply a ‘look back’ test to determine entitlement to sell land/property under the margin scheme. This is relevant where the acquisition of the land was either GST-free (e.g. as a supply of a going concern or because it is qualifying GST-free farmland) or non-taxable as a result of acquisition from an associate for no consideration.  Specifically, in determining whether a taxpayer’s acquisition of land is an ‘eligible acquisition’, the law requires the taxpayer to look back at the preceding acquisition of the land (‘previous acquisition’, e.g. the acquisition of the land by the taxable person who originally supplied it to the taxpayer).  Where the ‘previous acquisition’ was not an eligible acquisition, the taxpayer is not able to use the margin scheme on sale even though it acquired the land without GST.

Further, new provisions state that any interposed GST-free supply between two taxable supplies is excluded in determining the margin on which to calculate the GST due (on the second taxable supply).  The value of land when it was acquired by the taxable person which supplied it to the taxpayer as a GST-free supply is now to be used. For example, if Company A acquired land for $1m but sold it for $2m as a GST free supply to Company B, which sold it to Company C for $4m, Company B’s margin is $4m - $1m = $3m, NOT $4m-$2m = $2m).  This ensures that GST free supplies cannot be deliberately interposed for the purposes of reducing the margin on a subsequent taxable supply.

Uncommercial Property Arrangements
On 17 February 2009, the ATO issued a taxpayer alert, warning taxpayers that it is closely examining uncommercial property arrangements that try to obtain unintended GST benefits.

The alerts cover arrangements where land owners and associates delay invoicing and payment for construction services in an attempt to claim input tax credits and/or avoid GST.  The preliminary view of the tax office is that these arrangements constitute aggressive tax planning.  So, where you have either:

• a company providing construction services (for a new residential property) on land owned by an unregistered associate (which will delay registration until it receives a belated invoice for the construction services, shortly before it sells the property under the margin scheme), or
• a land owner leasing residential property constructed by an associate which has not invoiced the land owner or delays invoicing until the property is sold

As you can see from the above cases, legislative changes and tax payer alert, GST and property is very high up on the ATO's audit agenda and will continue to remain here in the future as the ATO seeks to maximise its revenue from this industry. Grant Thornton is able to help you navigate through this GST and property 'minefield' from a compliance perspective but also enabling substantial savings to be made, where possible.



For more information, contact:

Krish Patel
Partner - Tax
T +61 2 8297 2400
E krish.patel@au.gt.com