Whether or not a property is considered 'residential premises' for GST purposes is an important question for both sellers and buyers alike. The full Federal Court recently overturned the decision in the Sunchen case, removing a degree of uncertainty for taxpayers who are party to residential property transactions.
Key takeaways from this case
- Both sellers and buyers must carefully consider the GST consequences of every property transaction, and not simply rely on past assumptions about how much money needs to be set aside for GST. Even subtle differences between a current transaction and one you have entered into in the past may mean that its tax treatment is different.
- It is critical that GST issues are dealt with when preparing a sale contract to avoid incurring unexpected costs after the transaction settles.
The decision
Sunchen Pty Ltd v Commissioner of Taxation considered what may be residential property for GST purposes.
Sunchen purchased a property at Port Macquarie, which, at the time of settlement, included a tenanted house. The company had plans to develop the property, but these were not at an advanced stage when the property was purchased. In the purchase contract, Sunchen stated that it did not intend to change the use of the property, which, at the time, was predominantly for residential purposes. The contract further provided that if Sunchen changed the use of the property, the vendor would be indemnified from any GST liability this caused.
Sunchen was registered for GST. The company claimed an input tax credit (ITC), but the Australian Taxation Office disallowed the ITC claim. While the ATO was successful before both the Administrative Appeals Tribunal and a single judge of the Federal Court, the legal reasoning created substantial uncertainty about the GST treatment of very common property transactions.
The legal reasoning used
Generally, residential premises (other than 'new' premises) are not subject to GST. Whether an ITC is available depends on whether the sale is a taxable supply. This is based on whether the land is premises to be used predominantly for residential accommodation. If property is considered residential premises, no ITC is available.
In the full Federal Court, Justices Edmonds and Gilmour both said that whether a property was to be used for residential accommodation was an objective test that depended on the property's characteristics, not on the intention of the future owner. In the Sunchen case, the intention appeared to be to develop the house into a block of units at some time in the future, even though the property was being rented as a residence for at least six months after Sunchen acquired it.
This is in contrast to the earlier decision of the single judge, which followed the NSW Supreme Court decision of Toyama Pty Ltd v Landmark Building & Developments Pty Ltd. The finding in this case was that the intentions of the buyer were relevant (at least to some extent) in determining if a property was to be used predominantly for residential accommodation or whether the sale was a taxable supply.
This decision shows that GST law can be a lot more complex than business people may think. On a positive note, it does remove some uncertainty for taxpayers who are party to property transactions. A buyer should now not be able to change the seller's GST outcomes simply by claiming a particular 'intention'.
For more information about this case or the GST consequences of property transactions, please contact HopgoodGanim's Taxation and Revenue practice.
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