Clark McNamara Lawyers > News and Articles

Clark McNamara Lawyers

02-05-2000

GST and Property Development

Acquisitions and Sales

How GST applies to Real Property and the Liability for GST

Section 9.25 of the A New Tax System (Goods & Services) Tax Act 1999 (‘the Act’) says a supply of real property is connected with Australia if the property is in Australia.
Real Property includes:
(a) Any interest in or right over land;
(b) A personal right to call for or be granted any interest in or right over land.
Liability for paying the GST will lie with the supplier- ie the Vendor or the developer.
Whether GST applies to a Transaction depends primarily on the type of property being conveyed.

What property is subject to GST?

Commercial Property and Subdivisions:
The sale of all commercial property will be subject to GST. Subdivided lots will also be subject to GST.
New Residential Premises:
New residential premises will be subject to GST. These are defined as residential premises not previously sold as residential premises and not the subject of a long term lease (i.e a lease for at least 50 years. A lease will satisfy this if at the time of the Lease it was reasonable to expect it would continue for at least 50 years- query long term retirement village leases).
Commercial residential premises:
Commercial residential premises will be subject to GST. These are defined in the Act to include: hotels, motels, inns, hostels, boarding houses, boarding schools, some ships, caravan parks or camping grounds and anything similar.
Residential Premises:
Residential Premises will be input taxed and their sale will not attract a GST liability. Residential Premises means land or a building occupied or intended to be occupied as a residence and includes a floating home. The property must be used ‘predominantly’ as residential premises. The Act does not define predominantly. Accordingly, the sale of mixed use properties might attract GST depending on the proportion of the premises used for other purposes. Alternatively, sale of mixed use premises may be partly subject to GST and partly input taxed. This is the submission put to the ATO by the Consultative Committee on Property & Construction. The ATO is currently researching this.

When does the GST liability arise in acquisitions and sales?

Property transactions occur in two stages; a deposit is paid when Contracts are exchanged and the balance is paid at completion.
The GST liability arises upon completion or earlier possession. At this point the Vendor must pay GST. The purchaser may have to pay it as part of the costs of the transaction if the Contract provides for it. If the purchaser is registered, it can claim an input tax credit.
Deposits are treated according to GST Determination 2000/1 and Division 99 of the Act . A deposit held as security for the performance of an obligation is not consideration (and therefore a deposit is not liable to GST) unless it is forfeited or applied toward the consideration.

Options

If an entity enters into an option to purchase land, GST will be charged on the consideration paid for that option (see definition of Real Property). The later exercise of that option will only be taxable where a further payment is made.
What if you have entered into an option arrangement now, and will exercise your option after 1 July 2000?
The GST liability arises when the supply of the right is made. The subsequent exercise of that right is not another supply unless further consideration (ie. additional option fee) is paid.
Thus, an option entered into pre 1 July 2000 would not be liable for GST, as this is a supply made before the introduction of GST.

Commonwealth, State and Territory owned property

Under Division 38-445, a supply by the Commonwealth, a state, or territory of land on which there are no improvements is GST free if the supply is of the freehold or a long term lease, and there has not been a GST free supply of the land since 1 July 2000.

Is a Contract for Sale of Land an invoice?

The Act defines ‘invoice’ as a document notifying an obligation to make a payment. If a contract is an invoice GST has to be accounted for in the period in which contract is signed. We think this will be an unlikely outcome.
The Consultative Committee is seeking clarification from the ATO on this issue.

How is GST calculated?

There are 2 methods of calculating GST on the sale of property. These are the ‘normal’ method and the ‘margin scheme’. The Vendor can choose between these, and should this decide before putting the property to market. It should be clear to the purchaser which method is being used.

Normal Method

To determine the amount of GST to include in the sale price, divide the value of the sale by 1/10^th.
To determine how much GST is included in the price of an acquisition, divide the price by 1/11^th.
The Vendor remits the GST to the Tax Office.
The Acquiring Entity (if it is registered) claims the GST component of the sale price as a tax credit at the end of the tax period.
Property value is determined by the market value of the property (ie. purchase price), not development or construction costs.
The Vendor will include GST in the sale price, making gross sale price GST inclusive. Effect on revenue is neutral where the purchaser is registered.
If the Vendor chooses to use the normal method, the purchaser cannot later use the margin scheme when selling the land.

Margin Scheme

If you are selling to a purchaser who cannot claim input tax credits on its acquisition, such as a private individual, financial institution, life insurer or superannuation fund, the margin scheme may be more suitable. See diagram for when the scheme can be used.

If the seller is required to be registered on 1 July, 2000 and acquired the property before 1 July 2000 GST is 1/11^th of the difference between the consideration received for the property and the valuation of the property as at 1 July 2000.
If the seller acquired the property before 1 July 2000 but did not become registered or required to be registered until after 1 July 2000 GST is 1/11^th of the difference between the consideration received for the property and the valuation of the property as at the day the seller registered for GST.
If the seller acquired the land after 1 July 2000 GST is 1/11^th of the difference between the consideration paid to acquire the land and the consideration received from the sale of the land.
A valuation referred to above can be conducted in one of two ways as set out in GST Draft Ruling 1999/D9:
A valuation can be undertaken by a professional valuer.
Cost of Completion. This method requires you to calculate the cost incurred prior to the valuation date as a percentage of the total cost of completing the development. For a developer these costs would include the purchase of land and direct construction costs and infrastructure costs. Costs which should not be included are administrative costs and holding costs. GST Draft Ruling 1999/D9 sets out these requirements.

Issues with the margin scheme

Acquisition of property under the margin scheme will not give rise to an input tax credit for the person acquiring the real property. Businesses making taxable supplies will not want to acquire land under the Margin Scheme.
After 1 July 2000 where GST is calculated on the supply of land using the normal method, the margin scheme cannot be used to calculate GST on a later sale.

Development

Issues for Developers in General

Developers will find GST impacting upon almost all of their activities.
GST will apply to the acquisition and sale of land in the ways discussed previously.
GST will apply to development costs incurred to suppliers, contractors and consultants.
Developers are entitled to input tax credits in respect of the GST they pay.
Developers will have to consider their cashflow, to minimise the time between when the GST liabilities are incurred and when the reimbursement is received. Developers should delay major purchases to the end of the tax period.

Subdivisions

Land Acquisition issues- margin scheme v normal method.
Registered developers can get an input tax credit so may prefer to purchase property via the normal method.
Subdivision costs subject to GST include
- Surveys
- Roads
- Landscaping
- Grading
- Sewering
- Infrastructure
- In kind contributions to Councils
Selling Costs subject to GST include
- Legal Expenses
- Agents fees
- Auction fees
- Advertising
Under s81-5 of the Act , the Treasurer can exempt Australian taxes from the GST. The Treasurer has released a Determination which exempts the following relevant taxes:
Land Titles Office fees for registration of plans and instruments;
Office of State Revenue stamp duty on mortgages and conveyances;
Local Council fees for Development Applications, etc
Financing- there is no GST on interest on borrowed moneys, as financial supplies are input taxed.
Managing cashflow will now be critical for developers. There will be a potential 10% increase in input costs although Suppliers must pass on Sales Tax savings. GST paid on inputs will then be refunded by way of input tax credits.
Tax periods are the reporting periods for GST. Businesses should consider carefully which tax period is more effective.
Quarterly tax periods are periods of 3 months ending 30 September, 31 December, 31 March and 30 June.
Monthly tax periods end on the last day of each calendar month. If you or your corporate group have an annual turnover of less than $20,000,000.00 you can have quarterly or monthly tax periods. You can make this choice when you register for GST or you can later notify the ATO of your decision to change to a different tax period.
You must have a monthly tax period if:
(a) you or your corporate group has an annual turnover of $20,000,000.00 or more;
(b) you will be carrying on an enterprise for less than 3 months;
(c) you have a history of failing to comply with your tax obligations; or
(d) your income tax year does not end on 30 June.
You can end your tax period 7 days earlier or 7 days later if you want to line up your tax periods with your commercial accounting periods.

Construction Contracts

Builders will be charging GST on the Contract price of all services they provide. Registered developers will be able to get this back as an input tax credit.
Construction contracts spanning 1 July 2000 will only be subject to GST on the value of the works and materials undertaken after that date. There are specific rules for Construction Contracts made prior to 2 December, 1998 and 8 July, 1999.
If a construction agreement is made before 1 July 2000 and the construction work is made available to the recipient on or after 1 July 2000, the value of all work and materials permanently incorporated in or affixed to the site must be determined as at 1 July 2000.
The supply is of a total construction project not the components in its creation.
The provisions do not apply to an agreement involving a subcontractor but deals with the head contractor who delivers the completed construction project.
The methods for valuing work in progress are set out in GST Draft Ruling/D3. These are:
Total of approved progress claims to 1 July 2000
- This includes those progress payments approved on or after 1 July 2000 if relating to progress achieved before that date.
- Payments must be approved by a suitable qualified person under the construction agreement (eg. quantity surveyor or architect).
- The total approved pre 1 July 2000 progress claims should include all deductions made under retention agreements.
- The valuation should only include the value of fixed improvements not unfixed improvements.
Uniform increase between approved progress claims
- The principles are the same as All Approved Progress Payments above.
- This methodology reflects work done on the site to 1 July 2000. It treats the increase in total approved progress claims from the last claim date before 1 July 2000 to the first claim date afterwards as having occurred uniformly on a daily basis.
Independent valuation by a "recognised person"
- This is suitable if you are not satisfied that the above methods will give you an accurate valuation of work and materials as of 1 July 2000 or the work is not undertaken on a progressive claim basis. A recognised person is a member of the associations listed in the Ruling such as the Australian Institute of Quantity Surveyors, the Royal Australian Institute of Architects, Australian Property Institute, Institution of Engineers of Australia, or Association of Consulting Surveyors Australia.

Progress Payment Problem

When is GST payable under a Construction Contract?

Clause 29-5 of the GST Act says that GST is attributable to the tax period in which any of the consideration for the supply is received. A literal interpretation of this section means that a first progress payment under a construction contract could trigger payment of GST on the full contract amount.
Section 156 -5 of the GST Act states that the GST payable on a taxable supply that is made:
(a) for a period or on a progressive basis;
(b) for consideration that is provided on a progressive or periodic basis,
is attributable to one or more tax periods as if each progressive periodic component of the supplier were a separate supply.
This would mean the GST is payable only on the amount of each progress payment.
Under GST Draft Ruling 1999/D7 paragraph 55, a "long term construction contract" is one of the supplies to which section 156-5 applies.
There is no definition of "long term construction contract".
Developers should ensure that their Construction Contracts are structured around section 156 - 5.

Recipient Created Tax Invoices

Usually the supplier will generate and give to the recipient a tax invoice.
However, a recipient can generate its own tax invoices if:
(a) it has a turnover (including input tax supplies of at least $20,000,000.00 annually); or
(b) is a member of a group of companies of which one member has such a turnover.
If you do not fall within this group you can apply to the Commissioner for a special ruling.
You must be registered in order to be able to generate recipient created tax invoices and there must be an agreement between the supplier and recipient. The agreement must contain the following terms:
(a) the recipient can issue tax invoices in respect of the supplies;
(b) the supplier will not issue tax invoices in respect of the supplies;
(c) the supplier acknowledges that it is registered for GST when it enters into the agreement and that it will notify the recipient if it ceases to be registered;
(d) the recipient acknowledges that it is registered when it enters into the agreement and that it will notify the supplier if it ceases to be registered or if it ceases to satisfy any of the requirements of this Ruling; and
(e) the recipient indemnifies the supplier for any liability for GST and penalty that may arise from an understatement of the GST payable on any supply for which it issues an RCTI.
There are practical advantages in the building industry for a developer to be able to issue a RCTI with the Superintendent’s Progress Payment Certificate.

Off the plan units

Contracts for purchase of off the plan properties entered into prior to 1 July 2000 are not construction contracts, as the supply anticipated by these contracts is of completed premises.
Nevertheless if the premises are made available to the recipient after 1 July 2000, under a contract dated before 1 July 2000, GST will apply to the contract.
Where the GST is payable on an off the plan purchase contract, the margin scheme should be used requiring a valuation of the property as at 1 July 2000.

Insurance

Insurance companies have to remit 1/11^th of the price of general insurance to the tax office from 1 July 2000.
If you are registered for GST and take out general insurance for business purposes you will normally be entitled to claim input tax credits for GST on your insurance premiums.
You must inform your insurer of the extent to which you can claim input tax credits.
One off fees or commissions obtained from insurance intermediaries-GST is payable on the commission once, not treated as a continuing supply.

Sale of a Going Concern

The Act establishes that the supply of a going concern is GST free if:
(a) The supply is for consideration;
(b) The recipient is registered or required to be registered; and
(c) The supplier and the recipient have agreed in writing that the supply is of a going concern.
A supply of a going concern is a supply where:
(a) the supplier supplies to the recipient all of things that are necessary for the continued operations of an enterprise; and
(b) the supplier carries on or will carry on the enterprise until the day of the supply.
"GST free" means that you do not charge GST on the supply, but you are entitled to input tax credits for anything acquired or imported for use in your enterprise.
Is the sale of the commercial property by a business to another business the sale of a going concern within the Act?
This issue has been raised by the Consultative Committee with the ATO, which is undertaking further research.
If this section was to apply, you would need to ensure "all things" necessary to conduct the enterprise are transferred with the building, and that the purchaser is to continue the business.

Joint Ventures

The Act provides for GST Joint Ventures but is restricted in its operation to joint ventures for the exploration or exploitation of mineral deposits. These provisions enable the Joint Ventures to appoint a Joint Venture operator who collects and pays the GST on the transaction and receives the input tax credits.
We recommend that developers entering into joint venture agreements for the development of land provide in the joint venture agreement for the sharing of entitlements to input tax credits and liability for paying GST.

GST Groups

Firms with a common ownership or membership may operate as a group in relation to GST. Forming a GST group means that GST will not be paid and input tax credits will not be claimed on transactions within the group. This cuts down on GST accounting procedures and reduces the administration costs. The criteria for forming a group:
(a) each entity must be:
(i) a company; or
(ii) a partnership or trust that satisfies the requirements specified in the regulations.

GST groups are treated as a single entity
One entity member becomes the representative member and manages GST affairs and lodges the Business Activity Statement.

GST Branches

If you have branches that keep separate accounts which are amalgamated once a year then you may not wish to amalgamate them every time for each tax period under the GST. Accordingly you can treat you division and branches separately.

Paper presented by Paul Clark at GST Seminar, The Latest Property Issues, The Property Council of Australia (NSW Division) on 2 May, 2000.