Charlie and Chloe are old clients – and now they’re back. Some years ago they bought their dream home with a large block of land they couldn’t afford to live in and had to rent it out until they could.
Eventually they did move in but later decided to subdivide their large block and build the real dream home next door. They had some savings to do this but also had to borrow some extra. But before the subdivision was complete, Charlie and Chloe’s dream changed again when they found and bought another house to be the dream home. So they decided to sell the old house and borrow a bit more money to build a new house on the subdivided lot, which they would then sell.
Now the new house is built, they have a buyer, and they want you to act on the sale. On the contract you tick the 'NO' box to show it is not a taxable supply for GST and the box indicating Charlie and Chloe are neither registered nor required to be registered. You know that as a new construction, the house is 'new residential premises' and therefore not input taxed on sale.
Everything goes smoothly and the sale is settled 28 days after exchange. Charlie and Chloe are very happy.
In a private binding ruling ('PBR') issued on 9 October 2018 (number 1051439272306) on the same facts, the Commissioner ruled that all this (a) amounted to the conduct of an enterprise which (b) required them to register for GST which (c) would make them liable for GST on the sale.
The sale as an enterprise
Section 9.20(1) of the GST Act defines 'enterprise' to include things done '(b) in the form of an adventure or concern in the nature of trade'. In the PBR, the Commissioner relied on GSTD 2006/6 and MT 2006/1 - para 244 of which states that the above includes 'a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature.' And in the PBR, the Commissioner declared the activities described had the characteristics of a business deal because: (a) there was a change of purpose for which the property was held; (b) there was a subdivision and house construction; (c) Charlie and Chloe had a coherent plan for development; (d) they sold the original house to fund the construction; (e) the subdivision and construction was beyond necessary for Council approval; and (f) the building was in fact erected.
The requirement to register for GST
Charlie and Chloe would have to register for GST and therefore pay GST out of the sale proceeds. The Commissioner quotes para 33 of GSTR 2001/7 stating that '[a]n asset which is acquired and used for resale in the course of carrying on an enterprise… is not a "capital asset" for the purposes of paragraph 188-25(a)' of the GST Act, which would otherwise allow Charlie and Chloe to disregard the proceeds of sale in calculating the $75,000 threshold requiring registration.
Since 1 July 2018, because the sale was a taxable supply, vendors like Charlie and Chloe must give the buyer the information needed to deduct 1/11th from the price and pay it direct to the ATO (Taxation Administration Act 1953 sch 1, s 14-255 ('TAA Act')).
The penalty for failure to provide the buyer with the required information is a fine of up to $21,000. There is a partial defence under s 14-255(7) if the purchaser gives some but not all of the information required, but only if the vendor 'reasonably believed' there was no requirement for the missing details.
The purchaser is also in strife. Whether or not the vendor has given the required information, the purchaser is still required to deduct 1/11th of the contract price for payment to the ATO (TAA Act s 14-255(3)). The penalty for the poor purchaser is equal to the amount that should have been deducted – i.e. a potential liability of 2/11ths of the contract price (TAA Act s 16-30). However, the penalty does not apply in cases like Charlie and Chloe’s if the vendor gives a notice either stating the premises are not new residential premises or indicating the payment will not be required and there was nothing ‘that made it unreasonable’ for the purchaser to believe what the vendor said (TAA Act s 16-30(2)). But the GST liability seemingly remains.
The ATO is apparently preparing guidance on how the penalties will be imposed. Given the ATO’s approach to situations like this one, solicitors and conveyancers must act very carefully in considering whether or not GST might apply to the sale of a new house.
Take away points
- Presume the sale of a new house to be subject to GST unless established otherwise.
- Always think GST when buying or selling.
- This article covers just one aspect of the new regime.
This article is published in this month’s edition of the Law Society Journal of NSW.