Buying or selling property? You need to know your tax obligations upfront, particularly regarding GST.
While GST does not apply to most residential sales, it will be applicable where you are registered for GST and have used the property for a taxable activity.
Taxable activities in residential homes could include using a portion of the home for your business (i.e. an office or garage for storage) or short-term accommodation (i.e. Airbnb earning over $60,000 p.a.).
GST registration will often be clear (i.e. farms and commercial buildings), however, in some circumstances the situation can be uncertain especially with mixed use properties.
Vendor warranty
The standard sale and purchase agreement for real estate requires the Vendor to confirm their GST status for the sale. If the Vendor is registered for GST, then the Purchaser will also need to confirm their status.
If these are recorded incorrectly, the party at fault could be liable for any losses suffered by the other in reliance upon this.
The GST status of both parties impacts the outcome of the transaction.
- Zero-Rating: If both parties are GST-registered and the sale is part of a taxable activity, the transaction will generally be zero-rated with no GST payable.
- If the Vendor is not GST registered but the Purchaser is, then the Purchaser may be able to claim GST on the purchase.
- If the Vendor is GST registered but the Purchaser is not, then the Vendor will need to return for GST on the sale.
Purchase price allocation
When GST applies to a transaction, especially on mixed-use property, parties will need to consider whether the purchase price is allocated to different assets included in the sale (i.e. land or buildings). This allocation is used by the parties when completing their GST returns. The parties therefore need to get accounting advice to avoid any undue consequences.
Don't wait get professional advice
A mistake in the sale agreement can be extremely costly and difficult to fix after signing. If GST may apply to your transaction, confirming with your legal and accounting advisor is a must before signing. Your advisers will work together to ensure the contract correctly reflects your GST position and protects you from unexpected tax bills.