GST Insights | incorrect GST treatment on off-the-plan transactions

Recently I posted our article GST Insights | Consequences of non-resident on-selling off the plan properties.

Only days later, I found myself acting for clients dealing with a vendor who refused to register for GST.

The Vendor’s legal structure

The vendor’s legal structure looked something like this (I was not invited to review any documentation but after discussing the situation with the vendor’s advisors I was able to roughly piece together the following structure):

160628 GST developer image

In this particular instance, the vendor was (purportedly) an experienced builder with around 40 properties constructed and sold previously.  In the circumstances, it was readily apparent that the Vendor was required to register for GST.

However, the Vendor’s practice did not involve registering for GST as a trustee of a trust, but instead GST was charged and remitted by the Developer company.  I was informed by the Vendor’s advisors that they had proceeded on that basis for about 40 earlier transactions and in no instance did any of the purchasers’ representatives request the Vendor to register for GST  purposes.

Consequences of the Vendor’s GST position

The difficulty with the Vendor’s accounting for GST (to which 40 other purchasers acquiesced) is that the Developer company is not the entity which is making a “taxable supply” of selling the house and land package.  This meant that:

  1. The Vendor must charge GST on the Contract for Sale of Land where the Vendor is registered or required to be registered.
  2. As the entity which is not making the relevant “taxable supply” (being the sale of the house and land package) , Developer company is not entitled to charge GST on the Contract for Sale of Land.
  3. The “taxable supply” represented by the sale of the house and land package is still subject to GST (the Vendor’s failure to register for GST does not prevent the sale from constituting a “taxable supply”).
  4. The purchaser is liable to withhold and remit 49% of the Purchase Price on Completion of the Contract for Sale of Land to the Australian Taxation Office.

There is a 5th implication in that the Vendor and Developer company have not correctly filed BAS returns with the consequence that their individual GST positions may be materially incorrect.  There are serious consequences to individual taxpayers, company directors and corporate taxpayers alike for failing to accurately report and remit GST liabilities.

Put simply – the Vendor had obtained incorrect GST advice and consequently my clients were at risk of causing Completion to fail (and losing the property) because of the Vendor’s incorrect GST position.  In the circumstances, I simply could not advise my clients to proceed with exchanging Contracts.

It was only after I received and communicated my instructions not to exchange Contracts on this particular sale did the Vendor obtain a second GST opinion and offer to register for GST to facilitate the sale.  However, by that belated time, my clients could not be persuaded to continue with the transaction.

GST lesson for buyers and sellers

This story serves as a warning to buyers and sellers (and their representatives alike) of the dangers involved when specialist tax advice is not obtained prior to entering into a transaction; in particular, a purchaser’s tax due diligence process must recognise that a GST risk can represent more than 10% of the Contract value, and the risk is borne by a purchaser when a Vendor incorrectly fails to register for GST purposes.

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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