GST plays on the margins

Goods and Services tax on property will increase if a bill introduced to Federal Parliament becomes law.

The Government says the changes, which amend the way the margin scheme can be applied in determining the GST on sales of property,  reflect the clear intention of GST law from the outset.

The retrospective nature of the legislation is expected to have adverse implications for those who have used a margin scheme under which GST is imposed on the value added to the property rather than on the sale price.

Before the introduction of the bill, ‘value added’ could be calculated after the acquisition of the land, but will now be calculated from the introduction of the GST.

Phillips Fox solicitor Zoran Vukojevic said the changes would affect both developers and consumers.

“The legislation does have some merit in that it follows up from taxpayer alerts, but it is much broader than expected and will cause an inappropriate outcome in genuine commercial transactions,” he said.

“It is going to be hard to get around, especially if people are using existing exemptions like going concern, which relates to land as part of a business transaction.”

Phillips Fox property partner Peter Beekink said the retrospective application of the bill was the most contentious aspect of it.

“The retrospectivity of the proposed legislation means that developers have to go back and check they comply right up to the introduction of the GST,” he said.

“The retrospective approach is contrary to the usual approach to legislation, and it seems unfair to have people plan things which are legitimate at the time, and then retrospectively tax them.”

Indirect Tax Consulting director Keith Stewart warned that the changes would require property owners and developers to take extra care in planning and executing property deals, and that people involved in one-off transactions were likely to suffer most from the complicated rules.

“Vendors and purchasers will need to get up to speed with the changes quickly, but some developers will be caught out as they apply the rules developed over the past four years,” Mr Stewart said.

“Many will find that current projects costed on the basis of old law are now far less attractive and may even become unviable.

“Where a GST-free supply has been made of property, a subsequent sale under the margin scheme could require use of a valuation as at July 1 2000.

“This may require information available to a prior owner of land, and in future, purchasers may seek detailed valuations to support their GST position.”

In future both parties will have to agree in writing that a supply of property is subject to the margin scheme. This will affect new land releases throughout the state.

“Only the vendor is in the position to know whether the margin scheme can apply, so any private land buyer will be entirely dependant on the vendor in making such an agreement,” Mr Stewart said.

The new rules will also lead to an increase on the GST payable on some sales of property between related parties.

But there are some benefits in the changes, including that people will be able to receive property under wills to use the margin scheme.

The changes also clarify the tax office view that costs of developing the property in calculating the margin do not include construction costs incurred in improvements.