Vendor's GST payable
Question from Jitendra updated on 30th September 2014:
I am planning to buy a block of residential units as a long-term investment. The property is being sold by a developer who purchased it with the intention to subdivide into separate titles and hence has claimed GST on it. However the project was not feasible so he had it on holding for residential rental income. He is currently paying GST on residential rental income and is not sure if he should be or not. After taking 15% out for GST he is struggling to meet payments so has decided to sell it off at a bargain price. The catch is that he wants to sell it as a going concern. If I buy it as a going concern would I be liable to pay GST on my rental Income? And also just for knowledge, is he liable to pay GST on residential rental income considering that the property is still under the development company that never really did any development work?
Our expert Mark Withers responded:
The developer will have utilised the property in his taxable activity of development so will be liable for GST on disposal. When a property is held in a taxable activity but is then applied to the exempt activity GST adjustments are required to acknowledge the exempt activity. These were referred to as S21 adjustments and were historically made by paying GST on the rental income. This was then changed as a result of the decision in Lundy V CIR. Under Lundy adjustments were calculated on an alternative cheaper basis. This case also confirmed that where full output tax is paid any adjustments paid for the exempt activity can be reclaimed in the same period where the output tax is paid. These rules have recently changed again with the new periodic adjustment rules. From your perspective, the transaction must now be zero rated if both parties are registered, you warrant that the property will be used in your taxable activity and confirm it will not be your principal place of residence. If you simply intend holding them as residential investments though you will not have a taxable activity for GST and will not be entitled to register on this basis. You can of course accept a standard rated contract that is plus GST but will need to determine if the acquisition is still viable if you are charged 15% GST without the ability to recover it. It really just amounts to a negotiation on price given you both understand GST is payable by the vendor.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.