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P A G E 3 5
R E I Q J O U R N A L
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F E A T U R E
Supply of a Going Concern
If the owner is selling a residential
property that is not new or
substantially renovated, the supply
for GST purposes is ‘input taxed’ (ie,
the sale will not attract GST).
However, if the owner is selling
a property that is a commercial
property, new residential property,
or ‘second-hand’ residential property
that has been substantially renovated,
they may wish to consider if the sale
would qualify for the ‘supply of a
going concern’ GST-free treatment.
Generally speaking, assuming that
both parties are registered for GST,
the exemption will apply if the owner
continues to lease the property to the
tenant up to the time of settlement
and assigns the lease on the property
to the purchaser as part of the sale of
the property.
Naturally, given that the GST liability
on any transaction is usually imposed
on the supplier but for a few specific
exceptions, the owner will generally bear
a higher risk if the parties conducted
the sale on the basis that the exemption
applied and it is subsequently ruled
by the tax office that the sale did not
qualify for the exemption. Having said
that, the general amendment period
available to the tax office is limited to
four years, unless fraud is suspected
(which could extend the amendment
period indefinitely), so this risk should
not persist indefinitely.
To further mitigate this risk for the
owner, a GST recovery clause as
mentioned above should always be
negotiated in this type of situation.
However, as per the caveat above, this
contractual provision will only be as
good as the financial position of the
purchaser at the time when it is invoked.
If the purchaser goes broke after the
property purchase, the GST recovery
clause may not be of much use to the
owner, who will still be legally obliged to
pay back the GST to the tax office.
Further, even if the GST recovery
clause is effective, there remains a
risk that the tax office may impose
General Interest Charge from the
time the GST liability would have
been crystallised had the exemption
not been applied, even if the overall
transaction would have been GST
neutral (ie, the purchaser has the
ability to claim back the GST paid).
Margin Scheme
As mentioned above, if the owner is
liable to GST on the sale of a property
(ie, the property is not a ‘second-
hand’ residential property), the GST
is usually calculated as 1/11th of the
GST-inclusive contract price.
However, the owner may be eligible
to apply what is known as the ‘margin
scheme’ to reduce their GST liability,
provided that the parties agree for the
margin scheme to apply in writing.
As a general rule, if the owner did not
originally buy the property under the
margin scheme, they will not be able to
utilise the margin scheme when they
sell the property. An exception to this
is that if the owner originally bought
the property before 1 July 2000 or the
property was sold to them as a GST-
free supply or input taxed supply, then
they may still use the margin scheme.
Under the margin scheme, the owner
pays GST on 1/11th of the ‘margin’,
rather than the GST-inclusive sale
price, which is generally the amount
by which the GST-inclusive sale price
exceeds the original cost of the property
but excluding costs incurred during
the period in which the property was
owned by the owner (eg, construction
costs of a new building on the land).
For example, if the GST-inclusive sale
price of the property is $2,200,000
and the owner bought the property
for $1,650,000, their GST liability by
default would have been $2,200,000
x 1/11th = $200,000. However, if they
use the margin scheme, their GST
liability will be reduced to ($2,200,000
- $1,650,000) x 1/11th = $50,000.
The original cost of the property for
this calculation may be modified in
some circumstances (eg, if the owner
originally bought the property through
a GST-free supply, from a related party
or deceased estate, etc), so professional
advice should be sought.
The ability of the owner to negotiate for
the margin scheme to apply with the
purchaser may be affected by the impact
of the margin scheme to the purchaser.
Generally, if the margin scheme applies,
the purchaser will not be allowed to
claim any GST back on the purchase.
To that end, if the purchaser would
have been entitled to claim the GST
but for the margin scheme (eg, they are
registered for GST and will be renting out
the property as commercial premises),
they may not wish to enter into a margin
scheme agreement with the owner as
the agreement would prevent them from
claiming the GST back.
On the other hand, if the purchaser
would not have been entitled to claim
back the GST in any event (eg, they are
private residential property investors
who are not registered or required to be
registered for GST), they may be more
inclined to enter into an agreement for
the margin scheme to apply.
Further, the purchaser’s future
intention for the property may also
affect their decision as they will only
be able to use the margin scheme
themselves when they sell the property
in future if they buy the property under
the margin scheme now.
Last words
It should be apparent from the above
that a simple property contract could
be a minefield when it comes to
GST. Professional advice is therefore
advisable, especially if the value of the
property is high or the circumstances
involved are less than straightforward.
Important disclaimer:
No person
should rely on the contents of this
article without first obtaining advice
from a qualified professional person.
This article is provided on the terms
and understanding that the author and
BDO (QLD) Pty Ltd are not responsible
for the results of any actions taken on
the basis of information in this article,
nor for any error in or omission from
this article. The article is provided
for general information only and the
author and BDO (QLD) Pty Ltd are
not engaged to render professional
advice or services through this
article. The author and BDO (QLD)
Pty Ltd expressly disclaim all and
any liability and responsibility to any
person in respect of anything, and of
the consequences of anything, done
or omitted to be done by any such
person in reliance, whether wholly or
partially, upon the whole or any part
of the contents of this article.