Publications and News

Advising on the purchase of land? Beware the sting of GST withholding

25 October 2019

You are acting for Charlie and Chloe, new clients who left their former solicitor because, they say, he ‘stuffed up badly about GST’ on previous transactions. Chloe is clearly the spokesperson.

Now they want you to act for them on the purchase for $100,000 of a vacant block of land on which they plan to build their dream home.

The contract says the sale is a taxable supply, that the margin scheme applies, and that the withholding amount is $7,000.

You know about GST withholding on the sale of new residential premises, but so far not vacant land. Initially you assume it is all covered by the A New Tax System (Goods and Services Tax) Act 1999 (‘GST Act’) but ultimately locate the withholding provisions in schedule 1 to the Taxation Administration Act 1953 (‘TAA Act’).

You eventually find section 14-250 which applies GST withholding if the land is ‘potential residential land’.

The TAA Act refers you to the Income Tax Assessment Act 1997 (‘ITAA 1997’), which refers you to the GST Act, which tells you that ‘potential residential land’ is ‘land that it is permissible to use for residential purposes, but that does not contain any buildings that are residential premises’.

You know from the zoning certificate that residential purposes are permitted and Chloe told you that the land has nothing on it.

Okay, you say to yourself, I learn something new. But just before settlement the vendor’s solicitor calls to say his client didn’t realise withholding would apply and refuses to settle if it does.

You tell Chloe, who says 'here we go again – don’t stuff up like our last solicitor'. You go back to schedule 1 and find section 14-255(1) with more conditions. Charlie and Chloe won’t have to withhold if:

  • the land has a building used for a commercial purpose; or
  • they are registered for GST and acquire the land for a ‘creditable purpose’; or
  • the land is not in a ‘property subdivision plan’.

You know the land is vacant, so at least you don’t have to worry about what ‘commercial purpose’ means.

Charlie and Chloe are registered for GST because they operate a bakery, but you know they will not use the land for a creditable purpose because they are not acquiring it ‘in carrying on’ an enterprise (GST Act s 11-15).

And you see in section 195-1 of the GST Act that a ‘property subdivision plan’ is simply a registered plan.

Further discussions take place with the vendor’s solicitor, who ultimately persuades his client the 7 per cent withholding must apply. But 7 per cent of what? The contract says $7,000 but what about the adjustments? Should the 7 per cent include that?

Section 14-250 (6) and (7) of schedule 1 makes it clear that it is 7 per cent of the contract price. So finally the matter is settled.

The sting

Some time later, an angry Chloe calls to say you stuffed up – you should have deducted $9,091 and their new solicitor says they are facing a penalty for your incompetence. And hangs up.

Chloe told you who the new solicitor is, so you ring to find out what is going on. The new solicitor is sympathetic, but explains that following an audit the ATO said the margin scheme could not apply because normal 10 per cent GST was paid when the vendor bought it (GST Act s 75(3)(a)).

And it’s not enough that the contract says the margin scheme applies. The 7 per cent withholding applies only ‘if the margin scheme applies to the supply’. If it doesn’t, the requirement is to withhold 1/11th (s 14-250(6) of schedule 1).

And worse, section 16-30 of schedule 1 imposes a penalty equal to the amount that should have been paid.

And worse still, while there’s a defence for a purchaser of new residential property who relies on the contract (s 16-30(2)), there isn’t for a purchaser of potential residential land.

Chloe’s new solicitor says the ATO has indicated that ‘How the law will apply will depend on the facts… particularly in regard to whether each party acted reasonably in the circumstances.’

Which gives you some hope, but still – you lost a client.

Take away points

1. If the contract says the margin scheme applies, make sure it does by asking questions.

2. GST withholding is calculated on the price, not the settlement amount.

3. Hopefully the ATO will soon issue a ruling on how the penalties will apply.

This article is published in this month’s edition of the Law Society Journal of NSW.

Jim Main Business Lawyer / Director

Jim Main practices in business law generally with an emphasis on business succession, estate planning and tax. Jim has a Diploma in Law, is a.. Learn more about Jim Main

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