Errors in accounting for GST on residential property transactions are common and many parties entering into Sale and Purchase Agreements can be caught out on this.
The general rule when it comes to GST on residential transactions is that residential property transactions are exempt for GST. Usually, both parties are not registered for GST and the transaction is not subject to GST and the purchase price will be ‘inclusive of GST’. If the purchase price is “plus GST (if any)” this does not automatically mean GST is payable, it only means that the vendor can charge it if the property is or later becomes subject to GST. However, where the purchase price is inclusive of GST and the vendor is GST registered but the purchaser is not, the vendor will need to account for the GST when accepting the purchase price as the vendor cannot then charge GST at a later date. This is why it is important for sellers and buyers to ensure their GST position is correct initially when entering into Agreements.
One exception to the above is where both vendor and purchaser are GST registered and the transaction can be zero-rated (i.e. charged with GST at 0%).
However, there is a two-part rule you must comply with if you wish to zero-rate your transaction, which is:
Therefore, where the transaction is zero-rated, no GST is payable by the vendor or purchaser so the vendor should not return any GST on the transaction nor can the purchaser claim for GST. This is good for the vendor, but not satisfactory for the purchaser if it thought it would obtain a GST refund.
It is important to make sure the GST Schedule at the back of the Agreement is completed correctly to avoid your tax position changing from the time you enter the Agreement until the time you settle. This is because the Vendor can rely on the purchaser’s GST statements. For example, if the transaction was to be completed as a zero-rated transaction but it transpires that prior to settlement the purchaser’s GST position changes and they are no longer capable of completing a zero-rated transaction, then the Vendor is entitled to charge GST at 15% as the vendor would now be liable to pay tax on the transaction. This applies also to circumstances where the purchaser nominates a different entity to complete the transaction and once again, the GST position changes.
If you have any concerns or are unsure about your GST position when entering into Sale and Purchase Agreements relating to property transactions, we strongly recommend you receive advice from your accountant. We suggest that you confirm the GST position with your lawyer prior to entering into the Agreement and whether you are intending to change your GST position prior to the transaction settling, have paid tax on the property (as vendor) or are intending to claim tax on the property (as purchaser) to ensure all the information is available to be able to advise you correctly.
