GST Increases On Property Transactions

The key issue here  is when does the “time of supply” occur?

In property transactions this is usually when any special conditions of an agreement are confirmed.  At this point the agreement is often described as “unconditional” and the purchaser will then also usually pay a deposit.

If the “time of supply” occurs prior to 1 October 2010 then GST will be charged at 12.5%.  If, however, the “time of supply” occurs after this date then the new GST rate of 15% will apply and GST applicable transactions will be effected.

How this will affect vendors and purchasers will depend on whether one or both of them is registered for GST.  It may also depend on whether the agreement is stated to be “plus GST” or “inclusive of GST” – although this is more complicated than you might think at first.

Section 78 of the GST Act provides that a vendor is able to pass on any change (increase) in GST payable if and when the government changes the amount of this tax. 

In October 2010 a vendor is able to increase the purchase price to take into account the additional 2.5% in GST.

This means that if GST is relevant to the transaction then this will have the effect of increasing the purchase price, if the time of supply is after 1 October, regardless of whether the contract is stated to be “plus GST” or “GST inclusive.”

In other words, if you enter into an agreement to purchase a property from an owner who is registered for GST in (say) August which is stated to be “$450,000.00 inclusive of GST”, if the time of supply (most probably “confirmation”) is after 1 October 2010 then you will be required to pay $460,000.00 on settlement.

It is possible to contract out of s78 of the GST Act.  You can agree that the purchase price will remain $450,000.00.  However, many vendors will not wish to do this because that means that they will bear the additional tax and effectively sell the property for less.

Looking at the four common scenarios and assuming that the agreement is dated before 30 September but the time of supply is after 1 October 2010:

• If neither the vendor nor the purchaser are registered for GST (most ordinary property sales) then the change in GST will have no effect.
  
  
• If both parties are registered for GST then the effect is neutral, except that the purchaser will need to find more cash on the day of settlement as they will need to pay the increased price but they will then be able to claim the increase back in their next GST return.
  
  
• If the purchaser is registered for GST but not the vendor then this effectively makes the property cheaper for the purchaser as they can claim more GST back on the purchase price.
  
  
• If the vendor is registered for GST but the purchaser is not then the purchase price will increase whether the agreement is stated to be “plus GST” or “inclusive of GST.”  If it is “inclusive of GST” the parties could contract out of the increase.  This change will make the property more expensive to the purchaser. 

As you can see from the above the most significant effect is for GST unregistered purchasers buying from GST registered vendors. 

This would most commonly be some purchasers of commercial property and most purchasers of sections from a developer or houses from a builder.

If you are, or might be, in such a situation then you need to take extra care and seek our advice before proceeding with any agreement in the next few months.

Two final points:

• The Government has further signalled another GST change whereby commercial property transactions will be able to be zero-rated so that GST purchasers no longer have to pay any GST.  We will update you on this further once the policy has been made clear.
  
  
• Although this article focuses on Property Transactions the effect of the GST increase will work in similar ways for the purchase of any other goods, plant or machinery etc.

If you are in any doubt please contact us or your accountant.



This article has been prepared by Cavell Leitch Law for general information purposes only and important exceptions and other relevant factors may not have been included.  If understanding the legal area covered by this article as it affects your specific circumstances is important to you then please contact us for a proper legal opinion.