Dishonourable Intentions!

Does the intention of the purchaser determine the GST treatment of a property sale? Confusion reigns supreme!

Under section 40-65 the sale of residential premises is input taxed but only to the extent that the property is residential premises "to be used" predominantly for residential accommodation.

The meaning of "to be used" was debated in The Federal Court decision in Sunchen Pty Ltd v Commissioner of Taxation [2010] FCA 21 (29 January 2010). It was held in that case that the future intention of the purchaser should determine the GST treatment of the sale.

Facts

  • Sunchen purchased land upon which a house was erected. The contract included as a component of the purchase price an amount said to be for GST.
  • The purchaser claimed an input tax credit for this amount. The claim was disallowed on the basis that the supply was an input taxed supply.
  • The purchaser argued that it intended to develop the property and therefore the property was not held predominantly for residential use.
  • The evidence did not establish that the taxpayer's intention was to develop the property.

Issue and decision

The decision was that the input tax credit was not allowed.

The result was inevitable given the evidence but Perram J considered the meaning of the term "to be used" in section 40-65. In Toyama Pty Limited v Landmark Building and Developments Pty Ltd [2006] NSWSC 83; (2006) 197 FLR 74 the Supreme Court of NSW held that this term required an examination of the subjective intention of the purchaser. In contrast in Marana Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 307; (2004) 141 FCR 299 the Full Federal Court held that it was objective purpose or use for which the building was intended that was relevant. Although Perram J preferred the Marana approach he felt bound to follow the Toyama reasoning as this was not "plainly wrong".

Therefore he held that the subjective intention of the purchaser to use the property as residential accommodation or otherwise would determine whether the sale was an input taxed supply

Until there is legislative correction or further court consideration the intention of the purchaser is relevant in determining the GST status of the sale of residential property. This is a wholly undesirable situation.

In the meanwhile it is imperative that vendors ensure that their Sale Contracts incorporate appropriate GST clauses so they do not incur unexpected GST liabilities and/or undertake steps to determine the intention of their purchaser.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2009 Moore Stephens Australia Pty Limited. All rights reserved.