Various approaches are taken by law firms in calculating the GST payable by a purchaser under a contract for the sale of property which attracts GST. This includes calculating GST by reference to the adjusted contract price, calculating GST by reference to the purchase price plus adjustments but not minus adjustments, or calculating GST based on the actual purchase price in the contract.
The Australian Tax Office (ATO) view is that settlement adjustments (such as rates, land tax and other outgoings such as water rates) under a contract of sale of property form part of the consideration for the supply of the property. GST Ruling GSTD 2006/31 was issued by the Commissioner of Taxation to resolve the confusion surrounding the GST treatment of settlement adjustments and to clarify the ATO's position in light of certain court decisions which have indicated opposing views2.
So, how does it work practically? – Some examples
- Matt sells a block of land to Helen. The purchase price is
$100,000. Helen has paid a deposit of $10,000. Prior to settlement,
Matt pays a rates notice for $500.003 which covers a
period of time both before and after settlement. Matt is liable for
150 days and Helen is liable for 215 days4.
Purchase Price $100,000.00 Plus Rates adjustment ($500 x 215/365) $294.52 Adjusted Purchase Price $100,294.52 GST on Adjusted Purchase Price (10% of $100,125.00) $10,029.455 Balance $110,323.97 LESS Deposit $10,000 Balance due to Matt $100,323.97
Matt sells a block of land to Helen. The purchase price is $100,000 and Helen has paid a deposit of $10,000. Prior to settlement Matt receives a rates notice for $500.00 which covers a period of time both before and after settlement. The rates notice is not paid prior to settlement. Matt is liable for 150 days and Helen is liable for 215 days.
Purchase Price $100,000.00 Plus Rates adjustment ($500 x 215/365) $294.52 Adjusted Purchase Price $100,294.52 GST on Adjusted Purchase Price (10% of $100,125.00) $10,029.45 Balance $110,323.97 LESS Deposit $10,000 Balance due to Matt $100,323.97
While the above calculation is exactly the same as scenario one, a vendor in a situation where rates are not paid prior to settlement will direct a purchaser to provide a cheque at settlement in favour of the relevant council in payment of the rates.
In the above example, from the balance due to Matt of $100,323.97, the following cheques will be requested from Helen:
Local Council $500.00 Matt $99,823.97 Total $100,323.97
Matt sells a block of land to Helen. The purchase price is $100,000 and Helen has paid a deposit of $10,000. If rates have not been issued by the settlement date and are to be assessed to Helen after settlement to cover a period of time both before and after settlement an adjustment to the consideration may be made on an "unpaid" basis6. Matt is liable for 150 days and Helen is liable for 215 days. There is no second supply for GST purposes when the rates are actually assessed to Helen.
Purchase Price $100,000.00 Less Rates adjustment ($500 x 150/365) $205.50 Adjusted Purchase Price $99,794.52 GST on Adjusted Purchase Price (10% of $99,625.00) $9,979.45 Balance $109,773.97 LESS Deposit $10,000 Balance due to Matt $99,773.97
What about adjustments for rent?
While GST Ruling GSTD 2006/37 does not deal with whether rental adjustments are to be taken into account in calculating the GST payable by a purchaser, section 15 of the ATO's Property and Construction Industry Partnership – Issues Register8 confirms that the GST treatment of an adjustment for rent is to be treated in the same way as an adjustment for rates or land tax. A rent adjustment is an adjustment to the consideration paid for the sale of the relevant property. The question that then arises is, whether the adjustment for rent should be on the GST inclusive or GST exclusive rent paid by the tenant. There does not appear to be a consistent approach adopted by law firms, however the author suggests that rent be adjusted based on the GST exclusive amount as the vendor will have already remitted the GST paid by the tenant on the rent to the ATO9. The ATO has confirmed that this is a contractual issue between the vendor and the purchaser.
An important point to note is that any mortgage release fees or other lodgement fees are not taken into account for the purposes of calculating the GST payable by the purchaser10.
The GST payable by a purchaser should be calculated on the adjusted contract price taking into account both plus and minus adjustments.
1 GSTD 2006/3: Goods and Services Tax: are settlement adjustments taken into account to determine the consideration for the supply or acquisition of real property – 26 April 2006.
2 In the Commissioner of Taxation v Morgan (1961) 106 CLR 517 the High Court took the view that a settlement adjustment for rates paid in advance was not considered to be consideration for the property. In Federal Court in Coles Supermarkets Australia Pty Ltd v Westley Nomines Pty Ltd and Anor (2005) 60 ATR 52, the Federal Court similarly considered that a lessee's outgoings contribution did not form part of the consideration for the supply by way of lease. The Commissioner distinguished the above two cases in the GST ruling referred to in note 1 above.
3 The examples in this paper relate to the payment of rates, but the same method of calculation will apply to land tax and other outgoings such as water.
4 The author recognises that adjustments can be made on a quarterly, half yearly or yearly basis, however for the examples we have assumed a 365 day period.
5 A vendor will be required to provide a tax invoice to the purchaser at settlement for the GST amount.
6 In this example Helen and Matt can agree to adjust an amount being the estimate of the rates to be assessed. In this example the estimate is $500.
7 See note 1.
8 This document is a list of major issues and subsidiary questions that have been collated as a result of consultations with the Property & Construction sector.
9 This will avoid the situation of GST adjustments notes having to be issued by the vendor to the tenant.
10 This is because the liability to pay the lodgement fees under the contract usually rests with the vendor. The amount to be allowed on settlement is a provision to meet the vendor's liability and is not normally expressed to be an adjustment to the consideration being paid for the property.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.