Do these four little words cause you anxiety when reviewing a property contract?
You’re not alone. For many property investors, especially those dealing primarily with long-term residential rentals, GST is something they’ve rarely had to consider. These investors are usually not GST-registered and may have limited experience navigating GST obligations.
However, if a vendor is GST-registered in relation to the property being sold (in whole or in part), both parties need to have a sound understanding of how GST will be treated in the transaction.
Where GST Comes Into Play
Thankfully, the standard Sale and Purchase Agreement asks an important first question: Is the vendor GST-registered for this transaction? If the answer is yes, both parties are directed to complete the Schedule 1: GST Information section at the back of the agreement.
This section captures key information, including whether GST will be charged on all or part of the supply, and whether the transaction meets the criteria for zero-rating.
Also important is the “Payment of Purchase Price” clause. Here, parties must agree whether the sale price is:
-
Plus GST (if any), or
-
Inclusive of GST
A GST-registered vendor will usually prefer the Plus GST (if any) option, as it ensures any applicable GST (typically 15%) is added on top of the sale price. This protects the vendor in the case that the buyer is not GST-registered, meaning GST would need to be charged and paid.
On the other hand, non-registered buyers often prefer the Inclusive of GST option. This limits the risk of additional GST being unexpectedly added to the contract price later.
Before negotiating price, both parties must clearly understand each other’s GST position. A mismatch at this early stage can result in a significant and unexpected 15% variance in the final price.
What Is Zero Rating and When Does It Apply?
Zero rating was introduced to protect the government from paying GST refunds to registered purchasers in situations where GST hadn’t been collected from vendors – something that happened all too often during the GFC.
If both parties to a land transaction are GST-registered, and the purchaser confirms the property will be used for taxable activity (and not as their principal place of residence), the transaction must be zero rated. That means:
-
The vendor doesn’t charge GST
-
The purchaser can’t claim GST
This approach is standard for most commercial property and farmland transactions.
GST-Registered Sellers and Non-Registered Buyers: Take Extra Care
In scenarios involving GST-registered sellers – such as developers, traders, or short-term accommodation providers (like Airbnb hosts) – and non-registered buyers, it’s essential to be clear and deliberate when agreeing on the GST treatment.
What About Split Supplies?
Things get more complex when a single property includes both taxable and non-taxable elements. This is known as a split supply.
For example, a vendor may be GST-registered for a block of retail shops, but the property also includes residential flats above the shops. While the commercial spaces are subject to GST, the residential components are typically GST-exempt.
Schedule 1 of the Sale and Purchase Agreement becomes vital here. It asks whether any part of the property is used as a principal place of residence – not just by the vendor, but by anyone. If yes, further clarification is required to confirm whether that part of the property is a taxable or exempt supply.
Apportioning the Purchase Price
When GST applies to only part of the property, the total purchase price must be apportioned between the taxable and exempt portions. Be careful not to confuse this with purchase price allocation for depreciation purposes (i.e., dividing the value among land, buildings, and fit-out).
Schedule 1 – Don’t Overlook It
Schedule 1 is split into three parts:
-
Part 1: Vendor’s GST position
-
Part 2: Purchaser’s GST position
-
Part 3: Nominee’s GST position (used when a different entity will complete the transaction)
If a nominee will be settling the purchase, their GST details must also be confirmed to ensure consistency and compliance.
Final Thought: Get Professional Advice Early
The GST implications of a property transaction can be complex – especially when vendors are GST-registered and the supply may be partially or fully taxable. It’s critical to get the facts right before entering into an agreement.
If the vendor is GST-registered, Schedule 1 must be completed in full. If you’re unsure how to answer any part, stop and seek advice before proceeding. Getting clarity upfront can save you from costly surprises later.
Getting the facts straight, and understanding the consequences of them, takes the fear out of “Plus GST (if any).”