HG Alert: Buyers Creating GST Liabilities for Sellers - the Sunchen Case - 1 Mar 2010

The decision in Sunchen Pty Ltd v Commissioner of Taxation was handed down in the Federal Court on 29 January 2010. This case is relevant to property sellers who may need to charge GST on the sale of their property - those sellers that are either registered for GST or required to be registered for GST.

In this case, Sunchen purchased a property at Port Macquarie. At the time of settlement, the property included a tenanted house.

Sunchen had plans to develop the property, but these plans were not at an advanced stage at the time, or soon after, the property was purchased. In the contract, Sunchen stated that it did not intend to change the use of the property - which, at the time, was predominantly for residential purposes. The contract further provided that if there was such a change of use by the purchaser, and this caused a GST liability for the vendor, the purchaser indemnified the vendor for the GST costs.

Sunchen was registered for GST and claimed an input tax credit (ITC) - however, the Australian Tax Office (ATO) disallowed the ITC claim.

Legal reasoning

Whether an ITC is available depends on whether the land can be described as “premises to be used predominately for residential accommodation”.

If land can be described in this way, no ITC is available. This is because GST is not payable, nor any ITC available, on second-hand residential property to be used “predominately for residential accommodation”.

In determining whether the premises are predominately for residential accommodation, Justice Perram considered that he was required to follow the earlier NSW Supreme Court decision of Toyama Pty Ltd v Landmark Building & Developments Pty Ltd.

The Toyama decision held that the intentions of buyer were relevant (at least to some extent) in determining if a property was to be used predominantly for residential accommodation or whether the sale was a taxable supply.

Comment and action

This case was heard on appeal from the Administrative Appeals Tribunal. Even though the ATO won at the Tribunal stage, it funded the taxpayers’ appeal to the Federal Court to ‘test’ the legal principles in the Toyama decision.

By upholding Toyama, this decision does not remove the uncertainty for taxpayers (and the ATO) who are party to property deals because the seller’s liability for GST may depend upon the buyer’s future intended use of the property.

A seller may think the property they are selling is input taxed, and that they therefore do not have a liability for GST. However, the “intended use” of the buyer may make it a taxable supply, giving rise to a GST liability.

Given this, it is important that the sale contract reflects the parties’ understanding to minimise the risk of any disputes generally, and particularly over GST. Among other things, there may need to be clarity over the buyer’s intended use of the property and whether a tax invoice needs to be given to the buyer at completion.

Depending on how the contract is drafted, a seller may be stuck with a GST liability, or a buyer may hand over additional amounts on account of GST, even though the ATO may deny them ITCs.

For more information on this case or GST generally, please contact HopgoodGanim’s Taxation and Revenue team.