GST Implications on Commercial Property
On 1 July 2000, sales of commercial property became subject to the GST legislation. This has presented vendors and purchasers with a real dilemma because there are two main alternatives for calculating the GST payable: the normal method (calculating GST on the full sale price) and the margin scheme.
An incorrect choice or a failure to properly address GST can result in more GST, stamp duty and commissions being payable than need be - along with the loss of entitlements to input tax credits and the right to take advantage of GST concessions in future transactions.
Standard Scheme
| Under the standard GST rules, a vendor of commercial property will be liable for GST equal to 1/11th of the sale price. The purchase price will need to be increased to cover this liability, or a clause included in the contract permitting the vendor to recover the GST from the purchaser. Most purchasers will be entitled to claim the GST paid as an input credit in their next business activity statement. While they will receive a full refund, they will have to carry the GST cost for up to 4 months - which will be a cash flow consideration. Under this method purchasers will need an additional 10% in order to complete the transaction - and will have to bear the cost of financing that additional amount until the input tax credits can be claimed. The higher sale price also means additional stamp duty and agent's commission payable. |
Margin Scheme
| If the purchaser is not a registered business (eg a private individual) they will not be entitled to an input credit. It is anticipated that these buyers will pressure Vendors to adopt the margin scheme. Under the margin scheme, the Vendor obtains a valuation of the property as at 1 July 2000. The GST payable is 1/11th of the positive difference between the sale price (including GST) and the valuation - or its acquisition cost, if it was acquired after 1 July 2000. This can significantly reduce the amount of GST payable compared to the standard GST rules. It also results in savings of stamp duties, agent's commissions and financing costs. The margin scheme is particularly well suited to purchasers that cannot claim input tax credits such as financial institutions and purchasers of new residential property. The limitation is that the purchaser is not entitled to claim any input tax credit. For most purchasers that are normally entitled to input tax credits the loss of these credits will make this method of calculating GST unpalatable. For vendors who have failed to take GST into account in existing contracts that settle after 30 June 2000, the margin scheme also offers an opportunity to minimise their GST liability. |
The two schemes, are compared by way of the following example:
| Margin Scheme | Normal Method Paying Full GST | |
| Valuation 1/7/2000 | $1,500,000 | $1,500,000 |
| Sale Price including GST | $2,000,000 | $2,000,000 |
| Margin | $ 500,000 | N/A |
| GST Payable | $ 45,454 | $ 181,818 |
| GST Input Credit | Nil | $ 181,818 |
| Purchaser - Net Position Paid | $2,000,000 | $1,818,182* |
| Vendor - Net Position Received | $1,954,546 | $1,818,182 |
| * After BAS lodged and refund received | ||
In this example there is an obvious advantage to the Vendor to use the margin scheme. Purchasers, if they are a business registered for GST, will probably prefer the normal method because they will be entitled to a full input credit.
Whilst it is the Vendor who elects which method will be adopted, they will have to take into consideration the purchaser's position to achieve a sale.
Market forces and market prices will resolve this potential conflict of interest and determine which scheme is adopted. The choice will have to be decided at the time of negotiation - and it will have a bearing on the price paid for the property.
Vendors
| Vendors should ensure that they have provided for GST in either the sale price or in the contract. If they intend to use one of the concessional methods of calculating GST they need to ensure that the circumstances and the provisions of the contract permit that to occur. |
Purchasers
| Purchasers should ensure that the contract specifically identifies the method of accounting for GST to be applied. The purchaser's entitlement to claim input tax credits or apply the margin scheme in future sales can be lost as a result of the GST calculation method chosen by the vendor. |
The message for Vendors and Purchasers is to address GST, and the scheme to be adopted, up front in sale negotiations. As a matter of course, Vendors should get a valuation as at 1 July 2000. Also, they should discuss their preferred scheme and pricing implications with their Real Estate agent when contemplating selling a property.
