The decision in Sunchen Pty Ltd v Commissioner of
Taxation was handed down in the Federal Court on 29 January
2010. This case is relevant to property sellers who may need to
charge GST on the sale of their property - those sellers that are
either registered for GST or required to be registered for GST.
In this case, Sunchen purchased a property at Port Macquarie. At
the time of settlement, the property included a tenanted house.
Sunchen had plans to develop the property, but these plans were
not at an advanced stage at the time, or soon after, the property
was purchased. In the 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 there was such a change of use by the purchaser,
and this caused a GST liability for the vendor, the purchaser
indemnified the vendor for the GST costs.
Sunchen was registered for GST and claimed an input tax credit
(ITC) - however, the Australian Tax Office (ATO) disallowed the ITC
Whether an ITC is available depends on whether the land can be
described as "premises to be used predominately for
If land can be described in this way, no ITC is available. This
is because GST is not payable, nor any ITC available, on
second-hand residential property to be used "predominately for
In determining whether the premises are predominately for
residential accommodation, Justice Perram considered that he was
required to follow the earlier NSW Supreme Court decision of
Toyama Pty Ltd v Landmark Building & Developments Pty
The Toyama decision held that the intentions of 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.
Comment and action
This case was heard on appeal from the Administrative Appeals
Tribunal. Even though the ATO won at the Tribunal stage, it funded
the taxpayers' appeal to the Federal Court to 'test'
the legal principles in the Toyama decision.
By upholding Toyama, this decision does not remove the
uncertainty for taxpayers (and the ATO) who are party to property
deals because the seller's liability for GST may depend upon
the buyer's future intended use of the property.
A seller may think the property they are selling is input taxed,
and that they therefore do not have a liability for GST. However,
the "intended use" of the buyer may make it a taxable
supply, giving rise to a GST liability.
Given this, it is important that the sale contract reflects the
parties' understanding to minimise the risk of any disputes
generally, and particularly over GST. Among other things, there may
need to be clarity over the buyer's intended use of the
property and whether a tax invoice needs to be given to the buyer
Depending on how the contract is drafted, a seller may be stuck
with a GST liability, or a buyer may hand over additional amounts
on account of GST, even though the ATO may deny them ITCs.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).