Buying
a property is always exciting but equally challenging and tricky. One
should not get carried away with a perfectly landscaped garden or the
prime location of the property. A recent Federal Court decision drew
light to the relevance of GST liabilities associated with properties.
Quick
Facts
In
Sunchen Pty Ltd v
Commissioner of Taxation
[2010] FCA 21, the buyer initially purchased a property for
residential purposes.
If
the property were to be transformed into a commercial use by the
buyer, giving rise to a GST liability to the seller, the buyer would
indemnify the seller for the GST burden. These terms were clearly
provided for in the contract.
The
conflict arose when the buyer, who was already GST registered,
claimed an Input Tax Credit (ITC), which was denied by the ATO.
Point
of law
The
law looks at the dominant use of the property in determining whether
its owner qualifies for ITC. Where the dominant purpose is
residential, ITC will not apply.
In
Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC
83, the Supreme Court of New South Wales held that the intentions of
the buyer were reasonably relevant in determining the main use of the
property.
In
summary
The
buyer’s intention and the seller’s expectations do not always
synchronize. A seller may belabour under the false notion that the
property qualifies for ITC, thus removing GST liabilities. The
buyer’s intended use on the other hand may make it a taxable
supply, attracting GST.
The
ATO outlined similar concerns in the Toyama case – the seller may
be unaware of the buyer’s intention. This may adversely impact on
the seller’s GST liability. Contractual remedies may not always be
available or helpful for any misrepresentation that may be made.
The
moral of these cases is clarity – both in drafting a clear contract
and in showcasing clear intentions and consideration.
Therefore,
prudent buyers and sellers should investigate GST issues before
entering into contracts. If this is ignored, the seller may end up
with not just a rose garden and marble flooring but with a GST
liability as well.