36 / 52
R E I Q J O U R N A L
| J U N E 2 0 1 6
P A G E 3 4
GST Tips on
Property Contracts
WORDS BY EDDIE CHUNG, PARTNER, BDO, REIQ BOARD DIRECTOR
As a real estate agent, buying and selling properties is the
cornerstone of your business and the property contract is an
essential ingredient in your daily dealings.
Unfortunately, the property contract
is also one of the areas where costly
GST mistakes are made, so having a
good understanding of these issues
may give you an edge over your
competitors.
The Default Position
Generally, as a default position, if the
owner of a property is registered for
GST (or required to be registered for
GST), they are liable to pay GST on
the sale of the property, unless one of
the following applies:
• The property is ‘second-hand’
residential premises that have not
been substantially renovated; or
• The sale qualifies for the ‘supply
of a going concern’ GST-free
treatment.
In other words, the sale of property
is generally subject to GST only
if the property constitutes new
residential premises (such as, off-the-
plan residential units), substantially
renovated residential premises, or
commercial property.
The Commissioner of Taxation has
a view on the extent of work on
existing properties that is considered
‘substantial renovation’, so specialist
advice should be sought if this is a
‘grey area’ for your client.
Assuming that the sale of the
property will attract GST and the
‘margin scheme’ does not apply (see
below), the owner’s GST liability is
generally 1/11th of the GST-inclusive
price of the property. To that end,
your client should ensure that the
way the contract expresses the sale
price (ie, whether it is GST-inclusive
or GST-exclusive) will result in an
acceptable amount of net proceeds
for them after GST has been taken
into account.
For example, if the contract states
that the sale price of $1,100,000 is
GST-inclusive, then the owner will
only be entitled to $1,000,000 of the
net proceeds after they have paid
the GST to the tax office. However,
if the amount of $1,100,000 is GST-
exclusive and the contract allows the
owner to recover any applicable GST
from the purchaser, the actual price
payable by the purchaser would be
$1,100,000 + $110,000 = $1,210,000,
which means that the net proceeds
after GST has been paid to the tax
office will be $1,100,000.
Accordingly, it may be advisable
for the owner to negotiate a GST-
recovery clause in the contract such
that even if it has originally been
determined that the sale does not
attract GST, if it is subsequently ruled
by the tax office that GST does apply,
the clause would empower the owner
to recover the applicable GST from
the purchaser. Naturally, this is not
a perfect arrangement as the ability
of the owner to recover the GST
will depend on the solvency status
of the purchaser at the time but it
is certainly a reasonable GST risk
mitigation device.