The sale of real property generally involves the payment of a deposit at the time of exchange of contracts, with the balance of the purchase price payable on completion of the contract.
Clause 14 of the standard NSW Contract for Sale of Land provides that the Vendor is normally entitled to all rents and profits from the property up to the date of completion and is also responsible for all rates, water, sewerage and drainage charges, land tax and periodic outgoings up to the date of completion. The purchaser is responsible for the outgoings from the date of completion onwards.
The balance of the purchase price is adjusted to take into account these outgoings. The adjustments vary depending on whether the outgoings are paid in advance or are unpaid at the date of settlement. Take the following examples:
Example 1:
Council rates for the 2004/2005 rate year. The Vendor has paid the whole year’s rates. If completion takes place on 1 November 2004, the Purchaser reimburses the Vendor for rates from 1 November 2004 to 30 June 2005. The purchase price is increased by that rate adjustment.
Example 2:
If the rates were unpaid at the date of completion, the cheque directions for the balance of the purchase price would include a cheque to Council for the rates for the whole year. The purchaser would make an allowance for rates from 1 November 2004 to 30 June 2005. Because the cheque to Council exceeds the purchaser’s allowance, the Vendor effectively makes an allowance for the rates from 1 July 2004 to 1 November 2004. Money that would otherwise be paid to the Vendor on settlement is paid to Council.
The issue is whether GST is paid on the original purchase price or the adjusted purchase price.
As GST is payable on the consideration of the taxable supply the issue becomes do the adjustments form part of the consideration or are they something different.
Until recently the most definitive position of the ATO on this issue was contained in GST Ruling GSTR 2000/28. While not the main focus of the ruling, an example used in the ruling indicated that GST was payable on the original purchase price, not the adjusted purchase price.
However, in the Property and Construction Industry Partnership Issues Register Section 15.4, the Commissioner expressed the view that if the rates and outgoings have been paid by the Vendor in advance as in example 1 above, the adjustment by the purchaser is considered to be extra consideration and therefore GST is payable on that extra consideration – being the adjusted purchase price.
The Commissioner makes a distinction between the two examples, so that if the rates and outgoings are unpaid, the directions on settlement for cheques to be paid are a mere direction to apply some part of the consideration to discharge the vendor’s liability. Accordingly, there is no additional consideration and GST is payable on the original consideration.
This view seems to be a departure from the view taken in GST Ruling GSTR 2000/28 and the view of the High Court in FCT v Morgan (1961) 106 CLR 517 in which the view was taken that adjustments for rates and outgoings do not form part of the consideration.
As the view in the Property and Construction Industry Partnership Issues Register is not binding the approach to take with the sale of real property and GST is to calculate GST on the original purchase price, particularly where the adjustments are calculated on an unpaid basis. Where the calculation of the adjustments in on a paid basis and there is a significant GST liability we recommend a private ruling to determine whether GST is payable on the original purchase price or the adjusted purchase price. At least until a binding determination is made by the Commissioner.
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