GST Insights | Consequences of non-resident on-selling off the plan properties

Background

Most readers will be aware of the Australian banking sector’s refusal to lend to non-resident investors using foreign income as a basis for meeting lending criteria.

Off-the-plan property is attractive to non-resident investors for a host of reasons, but in particular, they are an asset class for which no FIRB approval is required.

Having spoken with a Sydney CBD real estate agent, we understand non-resident investors who are impacted by the lending freeze are attempting to escape the credit crunch by on-selling their off-the-plan properties.  Below we discuss a significant GST and tax risk which emerges from such transactions.

The GST sting

It is possible that a non-resident vendor of off-the-plan property should be registered for Australian GST purposes.

If the vendor fails to register for GST before completion, the on-sale may constitute a “taxable supply” meaning GST should be imposed on the sale price, but a vendor who is not registered for GST cannot impose GST.  This shifts the GST risk onto the purchasers who are then required to withhold amounts from payments to the vendor.

There are significant consequences to purchasers who fail to correctly withhold payments to unregistered vendors.  There is also the contractual risk of a failed settlement and termination/rescission for purchasers when seeking to adopt a low-risk GST approach.

Risk alert: we are seriously concerned that non-resident vendors are not obtaining appropriate GST advice and as a result they are (a) failing to register for Australian GST purposes and (b) failing to price and impose GST on an on-sale.  This in turns creates a serious concern that purchaser counterparties have not obtained appropriate GST advice to consider the ramifications of the vendor’s GST position.

If you or your clients are exposed to a purchase of off-the-plan property from a non-resident, we strongly recommend obtaining appropriate GST advice to mitigate the tax risks and contract failure risk which we anticipate will emerge as these off-the-plan properties are constructed and head towards completion.

Disclaimer

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article.

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